The last century was characterized by a well-documented marked increase in income inequality in the US (see Alvaredo et al., 2018, among many others), which fostered a vast debate among academics and policy makers about its determinants and consequences. Since individuals' utility ultimately depends on consumption and leisure, rather than just on income, for a comprehensive evaluation of the welfare consequences of increasing disparities researchers should also look at the dispersion of household expenditures and time use. Dispersion in consumption and leisure can behave differently from dispersion in income for a large variety of reasons, implying different conclusions about trends in inequality. Differences can arise because of consumption-smoothing mechanisms, because of the presence of Government transfers, or if the relative prices of goods consumed by low or high income households behave differently over time. Finally, if poor individuals engage more in leisure activities, the higher consumption of leisure may offset the lower consumption of goods in the evaluation of overall welfare.

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1 June 2020

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Journal of Economic Dynamics and Control 1152020

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DOI: 10.1016/j.jedc.2020.103886

https://www.sciencedirect.com/science/article/pii/S0165188920300555

This Journal article is published under the centre's Labour programme.