Inequality in Living Standards since 1980 Income Tells Only a Small Part of the Story Orazio P. Attanasio Erich Battistin Mario Padula Inequality in Living Standards since 1980 Inequality in Living Standards since 1980: Income Tells Only a Small Part of the Story Orazio P. Attanasio, Erich Battistin, and Mario Padula The AEI Press W A S H I N G T O N , D . C . Distributed by arrangement with the Rowman & Littlefield Publishing Group, 4501 Forbes Boulevard, Suite 200, Lanham, Maryland 20706. To order, call toll free 1-800-462-6420 or 1-717-794-3800. For all other inquiries, please contact AEI Press, 1150 Seventeenth Street, N.W., Washington, D.C. 20036, or call 1-800-862-5801. Library of Congress Cataloging-in-Publication Data Attanasio, Orazio P. Inequality in living standards since 1980: income tells only a small part of the story / Orazio P. Attanasio, Erich Battistin, and Mario Padula. p. cm. Includes bibliographical references and index. ISBN-13: 978-0-8447-4366-0 (cloth) ISBN-10: 0-8447-4366-6 (cloth) ISBN-13: 978-0-8447-4368-4 (pbk.) ISBN-10: 0-8447-4368-2 (pbk.) (etc.) 1. Cost and standard of living—United States. 2. Income distribution — United States. 3. Consumption (Economics) — United States. I. Battistin, E. (Erich) II. Padula, Mario. III. Title. HD6983.A88 2010 339.4'20973—dc22 2010027299 © 2011 by the American Enterprise Institute for Public Policy Research, Washington, D.C. All rights reserved. No part of this publication may be used or reproduced in any manner whatsoever without permission in writing from the American Enterprise Institute except in the case of brief quotations embodied in news articles, critical articles, or reviews. The views expressed in the publications of the American Enterprise Institute are those of the authors and do not necessarily reflect the views of the staff, advisory panels, officers, or trustees of AEI. Printed in the United States of America Contents LIST OF ILLUSTRATIONS vii ACKNOWLEDGMENTS ix FOREWORD, Nicholas Eberstadt x INTRODUCTION 1 Further Readings 6 1. CONSUMPTION INEQUALITY VERSUS WAGE AND INCOME INEQUALITY 9 Income versus Consumption 10 Consumption versus Expenditure 11 Analyzing Income and Consumption 12 Further Readings 16 2. MEASUREMENT ISSUES 17 Data Sources: The CEX 18 Our Samples, Adjustments of CEX Data, and Other Methodological Issues 22 Further Readings 30 3. RECENT TRENDS ON WAGES AND HOUSEHOLD INCOME INEQUALITY 31 Wages: CEX and CPS Evidence 33 Household Earnings: CEX and CPS Evidence 41 Further Readings 51 4. EXPENDITURE AND CONSUMPTION 52 5. INCOME AND EXPENDITURE POVERTY: HOW DO THEY DIFFER? 65 v vi INEQUALITY IN LIVING STANDARDS SINCE 1980 6. RELATING CONSUMPTION AND INCOME INEQUALITY 78 Relative Consumption and Wages 80 Within-Group Inequality in Consumption and Wages 83 CONCLUSION 85 APPENDIX 1: COMBINING CONSUMPTION INFORMATION FROM THE SURVEY COMPONENTS OF THE CEX 90 APPENDIX 2: ESTIMATING SERVICES FROM CARS 94 The Data 94 The Econometric Issues 96 NOTES 101 REFERENCES 105 ABOUT THE AUTHORS 108 List of Illustrations FIGURES 2-1 Mean Equivalence Scale 25 2-2 Nondurable Consumption Inequality from the Interview and Diary Surveys 27 2-3 Durable Consumption Inequality 29 3-1 CEX and CPS Wages 33 3-2 Median Log Wages (CEX and CPS) by Decade-of-Birth Cohort 34 3-3 Median Log Wages (CEX and CPS) by Educational Achievement 35 3-4 Differences across Education Groups: CEX and CPS 36 3-5 Difference between the 90th and 10th Percentile for Log Wages: CEX and CPS 37 3-6 Coefficient of Variation of Wages: CEX and CPS 38 3-7 Coefficient of Variation of Wages: CEX and CPS by Decade-of-Birth Cohort 39 3-8 Coefficient of Variation of Wages: CEX and CPS by Education 40 3-9 CEX and CPS Family Earnings, 1982–1984 Dollars 42 3-10 Median of Log Family Earnings: CEX and CPS by Decade-of-Birth Cohort 43 3-11 Median of Log Family Earnings: CEX and CPS by Education 44 3-12 Coefficient of Variation of Log Family Earnings: CEX and CPS 45 3-13 Coefficient of Variation of Log Family Earnings: CEX and CPS by Decade-of-Birth Cohort 46 vii viii INEQUALITY IN LIVING STANDARDS SINCE 1980 3-14 Coefficient of Variation of Log Family Earnings: CEX and CPS by Education 47 3-15 Inequality Trends within the Household 48 3-16 Inequality Trends within the Household by Decade-of-Birth Cohort 49 3-17 Inequality Trends within the Household by Education 50 4-1 Nondurable Consumption and Services: Levels 54 4-2 Nondurable Consumption and Services Levels by Decade-of-Birth Cohort 55 4-3 Nondurable Consumption and Services Levels by Education 56 4-4 Relative Consumption Levels: Log Nondurable Consumption Relative to High School Graduates 57 4-5 Total Consumption: Levels 58 4-6 Total Consumption Levels by Decade-of-Birth Cohort 59 4-7 Total Consumption Levels by Education 60 4-8 Relative Total Consumption by Education 61 4-9 Consumption Inequality: Standard Deviation of Log Total and Nondurable Consumption 62 4-10 Standard Deviation of Logs by Decade-of-Birth Cohort 63 4-11 Standard Deviation of Logs by Education 64 5-1 Median Consumption, 1982–1984 Dollars 66–67 5-2 Median Consumption for the Poor, 1982–1984 Dollars 68–69 5-3 Consumption Quintiles, 1982–1984 Dollars 70–71 5-4 Consumption Quintiles for the Poor, 1982–1984 Dollars 72–73 5-5 Consumption, Earnings, and Wages Well-Being 76–77 TABLES 5-1 Consumption in the Bottom of Earnings and Wage Distributions 74 6-1 Correlation over Time between Relative Changes in Consumption and Wages 81 6-2 Correlation between Consumption and Wages within Groups Inequality 84 A1-1 Expenditure Categories 93 A2-1 The Age-Time Matrix for Cars 97 Acknowledgments We would like to thank the audience at the AEI presentation of a first draft in September 2007 and in particular Steven Davis for much useful feedback. ix