One of the newsletters last month (How unequal is Bolivia really?) argued that it is better to measure inequality on consumption than on income, as income is very imperfectly measured, especially in poor countries with a large share of self-employment. The newsletter also suggested that when measuring inequality on consumption, United States is probably more unequal than Bolivia. The latter appears to be incorrect, as one careful reader kindly pointed out.
The study by Krueger & Perri (2006) investigates the relationship between income inequality and consumption inequality in United States and find that the consumption based GINI coefficient is about 11 percentage points lower than the income based GINI coefficient (1), which would bring consumption inequality in the US much below consumption inequality in Bolivia.
Furthermore, an article in The Economist “The new (improved) Gilded Age“ suggests that even consumption based GINI coefficients overstate inequality in the US, as they measure only how much money we have spent, not the value gained in the spending. They give the following example: “Refrigerators are now all but universal in America, even though refrigerator inequality continues to grow. The Sub-Zero PRO 48, which the manufacturer calls “a monument to food preservation”, costs about $11,000, compared with a paltry $350 for the IKEA Energisk B18 W. The lived difference, however, is rather smaller than that between having fresh meat and milk and having none.”
The same argument can be made for cars, TVs, and many other almost universal household goods in the US. The utility of a fancy $1.000.000 Ferrari is certainly not 100 times bigger than the utility of a practical $10.000 used car, and you get pretty much the same information out of a $200 TV set as a $20.000 TV set.
Bolivia is very different. Here there is real, lived inequality as only 30% of households have a refrigerator, 12% a car, and 60% a TV. Some 28% of households do not have electricity, and 78% do not have piped water in their house (2).
But then again, if your fresh meat and milk walk around on two or four legs in your garden, you may not derive much utility from a refrigerator, and if there is no road to your house, a car is of little use. The fact that most households choose to buy a TV before a refrigerator, suggests that the difference between no refrigerator and a cheap refrigerator is very small for them. In Bolivia, public transportation is so cheap and abundant, that having a private car adds little utility, but quite a lot of extra worries and expenses.
So, inequality is a really difficult concept to measure. Mostly because the value of things have little to do with the price of things, and because preferences differ so much. If somebody prefers to lie in a hammock reading a book and drinking river-cold beer rather than slaving in an office or factory from 9 to 5 to be ableto buy a car, a refrigerator and a TV, I would not necessarily call the former poorer than the latter, although both consumption and income measures would strongly suggest so.
What else can be a measure of inequality? Leave your thoughts below!
(*) Director, Institute for Advanced Development Studies, La Paz, Bolivia. The author happily receives comments at the following e-mail: email@example.com.
(1) Krueger, Dirk & Fabrizio Perri (2006) “Does Income Inequality Lead to Consumption Inequality? Evidence and Theory“, Review of Economic Studies, 73(1): 163-193.
(2) According to the 2003 National Health Survey.