NBER Economic Fluctuations and Growth Program Meeting July 2011, Cambridge MA

1. Discussion of “Has consumption inequality mirrored income inequality?”by Mark Aguiar and Mark Bils NBER Economic Fluctuations and Growth Program Meeting July 2011, Cambridge MA Jonathan A. Parker Kellogg School of Management, Northwestern University

3. I. Background Krueger Perri (2003, 2006)

4. Possible explanations • Near-complete consumption insurance 2. Self-insurance • Increase in Var(lny) due to transitory shocks to income (Krueger Perri) • Income changes expected (Primicerivan Rens) 3. CEX under-measures increase in consumption inequality • And so do related expenditure datasets

5. Three possible problems with CEX • Decreasing coverage or participation of high-consumption households • Cannot explain • Decreasing coverage/measurement of luxury goods • Decreasing measurement or coverage of all expenditures of high-consumption households

6. II. Bils and Aguiar In the CEX, • There is notincreasing under-measurement of luxuries vs. necessities • But there is increasing under-measuring of the all expenditures of high-consumption households over time . . • So consumption inequality has actually increased as much as income inequality Bottom line: I think this is probablycorrect

7. The essence of the exercise Log budget share of good: lnwi = ln (xi /X ) Inferred 2007 Observed 2006 Estimated Engel curve for luxury Observed 1980 Inferred adjustment to ln X90 Estimated Engel curve for normal good Log total real expenditure: X = xLux+xNormal+xNec ln X90 ln X90 lnX10 ln X90 lnX10

8. III. Two key assumption in method • Prices don’t matter Typical demand system x, Xnominal expenditures: wi,t = xi,t/ Xi,= αi+ γi’lnpt + βiln (Xi,t/ a(pt))+ εi,t + Restrictions of demand theory • The danger: In AB framework, real shares could vary due to substitution due to changes in relative prices • Partly an issue of question, partly of restricting data • Dora Costa and James Hamilton infer bias in CPI assuming well-measured total and shares • Infer pt from parameters and xi,tand Xi,t • If AB had blamed under-measurement of luxuries, this would be more of a worry

9. Elasticities are well-measured Typical demand system x,X nominal expenditures: wi,t = xi,t/ Xi,= αi + γi’lnpt + βiln (Xi,t / a(pt)) + εi,t + Restrictions of demand theory • The AB framework is nonstandard • Usually instrument for X due to noise in x getting intoX • Observation: slope of late-sample Engels curves should be steeper

10. 2006 estimate of βLux should be larger than 1980 estimate Log budget share of good: lnwi = ln (xi /X ) Observed 2006 Estimated Engel curve for luxury 2006 Estimated Engel curve for luxury 1980 Observed 1980 Observed 1980 and2006 Estimated Engel curve for normal good Log total real expenditure: X = xLux+xNormal+xNec ln X90 lnX10 ln X90

11. But Figure 5: Elasticities are stable

12. But OK: because elasticities have measurement error, reverse regression shows change we expect

13. IV. Corroborating/related evidence

14. Fact 1: consumption inequality (mostly) tracks income inequality across groups of households Cutler and Katz (1991)

15. Fact 2: improved consumption measurement shows slightly more consumption inequality Attansio, Battistin, Ichimura (2004)

16. Fact 3: CEX shows increased saving rates and bigger increases for high-income households Parker, Vissing-Jorgensen, Ziebarth(Summer Institute 2009)

17. Inconsistent with NIPA & FOF & SCF Maki and Palumbo (2001) use SCF/FOF data • Saving rates by quintiles of income from changes in wealth, returns, and income • Increase in saving rates for low income • But decrease in saving for high income: 9% to -2% Parker, Vissing-Jorgensen, Ziebarth: this implies • CEX measures low consumption about right • CEX measures 74% of top consumption in 1980 and this falls to 51% in 1990 (problem: assumed homogeneity in returns by class)

18. Recall: Three possible problems with CEX • Decreasing coverage or participation of high-consumption households • Cannot explain • Decreasing coverage/measurement of luxury goods • Decreasing measurement or coverage of all expenditures of high-consumption households

19. On 2: measurement of luxuriesParker, Vissing-Jorgensen, Ziebarth (Summer Institute 2009)

20. On 2: measurement of luxuriesParker, Vissing-Jorgensen, Ziebarth (Summer Institute 2009) • Calculate the ratio of aggregate CEX consumption to NIPA consumption for each goods in each year • Scale up CEX expenditures by good and time specific factors • Recalculate CEX consumption inequality Finding: adjustment makes little difference => 0.04 higher increase in 90-10 log expenditure PVZ also estimated group mismeasurement necessary to generate ratios, but AB method better => no PVZ paper

21. Summary • For high consumptionhouseholds, the budget share of luxuries has risen more than implied by their rise in total spending and Engel curves • Implication: their total spending is undermeasured • Consistent with corroborating evidence • Relies on stability of demand system and well-measured prices

22. The essence of the exercise Log budget share of good: lnwk= ln (xk /X ) Inferred 2007 Observed 2006 Estimated Engel curve for luxury Observed 1980 Inferred adjustment to ln X90 Estimated Engel curve for normal good Log total real expenditure: X = xLux+xNormal+xNec ln X90 ln X90 lnX10 ln X90 lnX10

23. Appendix

24. 90-10 Inequality in men’s log wages Juhn Murphy Pierce (1993)

25. 90-10 Inequality in men’s log income Gordon (2008)