Presented by James X. Sullivan (University of Notre Dame, Director and Co-Founder, Wilson Sheehan Lab for Economic Opportunities (LEO))
Income and (less frequently) consumption are both used as indicators of changes in economic well-being. We consider the pros and cons of each of these measures of well-being, discussing both conceptual and measurement issues. Conceptual arguments as to whether income or consumption is a better measure of material well-being almost always favour consumption. Both measures are reported in surveys with error. However, empirical evidence indicates that consumption is more accurately reported, particularly for those at the bottom of the distribution. For example, measures of material hardship or adverse family outcomes are more severe for those with low consumption than for those with low income, indicating that consumption does a better job of capturing well-being for these families. Within survey comparisons of income and consumption for the same families indicate that income is significantly underreported at the bottom, and this evidence is supported by new research that relies on income data in surveys linked to administrative records. We show that income and consumption measures of economic well-being generate very different patterns for changes over time in inequality and poverty.
James Sullivan is a Professor of Economics at the University of Notre Dame. He has been a visiting scholar at the National Poverty Center and a visiting professor at the University of Chicago, and in 2019-2020 he served as a national Phi Betta Kappa Visiting Scholar. He serves on the National Poverty Research Center Advisory Board, and was an appointed member of the U.S. Commission on Social Impact Partnerships. His research examines the effectiveness of anti-poverty programs at the national, state, and local level. In 2012, with fellow Notre Dame Professor William Evans, Professor Sullivan founded the Wilson Sheehan Lab for Economic Opportunities (LEO) and currently serves as the lab’s director. LEO is a research center that works with service providers and policymakers to identify effective and scalable solutions to reduce poverty in America.