Tuesday, June 26, 2012
In recent times, the debate surrounding middle-class welfare has tended to focus on the issue of income inequality. In a popular 2006 paper [The Evolution of Top Incomes: A Historical and International Perspective (updated here)], economists Thomas Piketty and Emmanuel Saez use tax return data from the IRS to suggest that income inequality has widened significantly over the period 1913 to 2010. Another frequently cited statistic is that in 2010, approximately half of all reported income went to the top 10% of earners.
We argue in this paper that income data are not the best measure of overall welfare. What matters for household well-being is consumption, since households are better able to smooth consumption rather than income over their lifetime. To that end, we use two alternative sources of data to assess changes in consumption inequality.
Update: Dan Shaviro (NYU), Might Inequality Actually be Narrowing?