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Income Shocks or Insurance - What Determines Consumption Inequality?

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  • Ludwig, Johannes

Abstract

Contrary to the implications of economic theory, consumption inequality in the US did not react to the increases in income inequality during the last three decades. This paper investigates if a change in the type of income inequality - from permanent to transitory - or a change in the ability to insure income shocks is responsible for this. A measure of household consumption is imputed into the Panel Study of Income Dynamics to create panel data on income and consumption for the period 1980-2010. The minimum distance investigation of covariance relationships shows that both explanations work together: the share of transitory shocks increases over time, but the capability to insure permanent and transitory shocks to income also improves. Together, these phenomena can explain the lack of an increase in consumption inequality.

Suggested Citation

  • Ludwig, Johannes, 2015. "Income Shocks or Insurance - What Determines Consumption Inequality?," Ruhr Economic Papers 550, RWI - Leibniz-Institut für Wirtschaftsforschung, Ruhr-University Bochum, TU Dortmund University, University of Duisburg-Essen.
    • Handle: RePEc:zbw:rwirep:550
    DOI: 10.4419/86788628
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    Keywords

    consumption inequality; income inequality; consumption insurance;
    All these keywords.

    JEL classification:

    • D12 - Microeconomics - - Household Behavior - - - Consumer Economics: Empirical Analysis
    • D31 - Microeconomics - - Distribution - - - Personal Income and Wealth Distribution
    • E21 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Consumption; Saving; Wealth

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