American inequality over-stated?

In: Uncategorized

25 Jul 2008

Studies of inequality typically overstate the widening of inequality in America according to a study cited in the Economist. The magazine’s Economics Focus column refers to work which argues that the inflation rate for the poor has generally proved higher than for the rich:

“A challenge to the conventional wisdom is set out in a recent research paper by Christian Broda and John Romalis, both of the University of Chicago’s business school. They argue that standard measures of inequality do not reflect differences in the way that the rich and poor spend their money. A person’s demand for a particular good or service does not rise in exact proportion to his income. As he grows richer, the pattern of his spending changes, as well as the amount. In particular, high-wage households spend a greater share of their income on services and a smaller share on “non-durable” items, such as food, clothing, footwear and toiletries.

“For most of the past three decades, the price of non-durable goods has been falling relative to the price of the services—investment advice, personal care, domestic help and so on—that the rich spend more of their money on. If these differences between the inflation rates faced by the rich and the poor are taken into account, the rise in inequality is reduced and may even vanish.”

The article acknowledges that the recent rise in food and commodity prices may have reversed part of this trend.

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