Has consumption inequality mirrored income inequality: new evidence from a Korean household panel

ABSTRACT

We examine how consumption inequality tracks income inequality in a Korean household panel. To adjust for measurement errors in consumption, we employ the double-differencing correction of Aguiar and Bils (2015) (AB hereafter). In the first stage of the double-differencing, AB used current income as an instrument for unobserved true total expenditure, and we use permanent income as the instrument instead. For the U.S. Consumer Expenditure Survey data, AB found that after correcting for measurement errors, consumption inequality tracks income inequality more closely. We find that the same conclusion holds for the Korean panel data and the estimate of consumption inequality is robust to the choice of instrument for the total expenditure in the first stage regression.

KEYWORDS:

• Inequality
• measurement error
• permanent income
• double-differencing

JEL CLASSIFICATION:

• D31
• E21
• D63

Disclosure statement

No potential conflict of interest was reported by the author(s).

Notes

¹ See e.g. Cutler and Katz (1992), Moffitt and Gottschalk (1995), Meghir and Pistaferri (2004), Baker and Solon (2003), Guvenen (2009), Jonathan, Perri, and Violante (2010).

² See e.g. Krueger and Perri (2006); Blundell, Pistaferri, and Preston (2008), Jappelli and Pistaferri (2010).

³ Good-time specific measurement error is associated with misreporting on expenditure of a given good for all households. Income-time specific measurement error is associated with misreporting on expenditure of every good for all households in a given income group. Good-household-time specific measurement error is associated with misreporting on expenditure of a given good and a given household.

⁴ KLIPS shares some features of the Panel Study of Income Dynamics (PSID) in the U.S. but differs in important ways. PSID’s measurement of consumption is limited but KLIPS has comprehensive measures of both income and consumption.

⁵ Following Blundell, Pistaferri, and Preston (2008) we define outliers in disposable income as households with income growth above 500% or below −80%. For outliers in expenditures, we follow AB by dropping households that spend more than half of their disposable income on any category except housing and food expenditures.

⁶ Most of these categories are used for computing the Korean consumer price index (CPI). Family event is not in the CPI basket but is included here. ‘Alcohol and cigarette’ are in the basket for CPI but not reported in KLIPS.