Wednesday, December 06, 2006

Spending Inequality vs. Income Inequality

An interesting article looking at how spending inequality in the US is much lower than income inequality.

Last year Americans in the lowest income quintile spent an average of $11,247 per person, according to the Bureau of Labor Statistics, compared with $15,843 for middle income quintiles, and $28,272 for the top quintile. The top group is spending only 2.5 times as much as the bottom group, and 1.8 times as much as the middle classes. This is not major inequality.
I agree that spending makes more sense to look at than income when talking about inequality, and adjusting the numbers per person rather than per household makes sense too. I don't know what classifies as 'major inequality', but the 2.5 ratio is much less than the 15.3 time difference in income.

Income inequality has gone up greatly over the last 20 years. What about spending inequality?
The lowest quintile is spending 14% more in 2005 than it was in 1985, the second quintile 16%, the third quintile 11%, the fourth 13%, and the top quintile is spending an additional 16%.
Doesn't look like it has changed much at all.

Aside from tax payments and transfer receipts, why is spending inequality per person less than many popular measures of income inequality?
The average number of people for a household in the lowest quintile is 1.7. It increases to 2.5 people for the middle quintile and reaches 3.2 people for the highest quintile.
I was surprised to find out that there was that much difference in number of people in a household between income quintiles. Which really reflects poorly on me because I have looked at this data set before. :)

So how much difference is there in the way that the rich and poor spend their money?
The differences between per person spending are even smaller for food and housing. Those in the top 20% of income earners spend $3,141 on food per person and those at the bottom 20% spend $1,792, i.e. the top group spends less than twice as much. For housing, the lowest spends about half as much as the highest.

With health care spending, an area where conventional wisdom holds that the poor are falling behind, the top group spends about 1.5 times the lowest group. For clothing, the top group spends just over twice the amount as the bottom group.

The top group spends almost three times as much on entertainment as does the lowest group, and just over twice as much as middle-income groups. And the top group spends three times as much on transportation as the lowest group, but only 1.6 times as much as the middle groups.

Spending on personal insurance and pensions shows the most inequality. Spending by the top group is more than 15 times the lowest group, and three times as much as the middle groups. This type of spending includes individual retirement accounts, 401(k) plans, and life insurance. It's not that the top group is spending substantially more, but it is saving more.
via NY Sun via Greg Mankiw Blog

Data from the BLS: 2005, 1985

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