Consumption Inequality

M uch of the debate over the rising levels of inequality in the United States and other developed countries is phrased in terms of income, or in terms of components of income like wages and earnings. But for economists, a basic utility function of individuals typically refers to consumption and leisure, not income. The distinction between income and consumption could make a meaningful difference in thinking about inequality if the distribution of consumption at a given point in time is less wide than that of income, or if its evolution over time is smoother than that of income. Consumption can differ from income if consumers borrow or save, or if they receive transfers from other family members or the government in response to income shocks. The joint analysis of consumption and income inequality can be informative in several ways. It can show the presence (or lack) of such consumption-smoothing mechanisms. It can shed light on the nature of income shocks, and in particular the extent to which they should be understood as temporary (which may be easier to smooth out for consumption Consumption Inequality