Association for Public Policy Analysis & Management

Economic inequality is multi-dimensional. Income, consumption, and net wealth, independently and jointly, inform the perception of inequality. Yet most studies of inequality limit analysis to one dimension of inequality. Even those using more than one measure present the measures separately. Because the three measures are not perfectly correlated, our understanding of inequality deepens by studying inequality in two and three dimensions.  We are the first to study inequality in two and three dimensions, and to do so we use income, consumption, and net worth from the 1989-2013 Surveys of Consumer Finance (SCF). Our focus is on two questions.  What does inequality in two and three dimensions look like? And, has inequality in two dimensions increased by more than inequality in one dimension?

The common thread through inequality research is increasing economic inequality, whether using income, consumption, or wealth. Given the consensus of increasing inequality, the necessity of studying the three measures conjointly may be questioned. However, income, consumption, and wealth are not perfectly correlated.  The life-cycle pattern of the measures best demonstrates this imperfect correlation.  Younger adults often have consumption exceeding income along with low or negative wealth, while older adults often have relatively high consumption and high wealth but low income (Fisher, Johnson, Smeeding, and Thompson, 2015).  The Report by the Commission on the Measurement of Economic Performance and Social Progress (Stiglitz et al., 2009) also argues for the joint study of the three measures, stating that, “the most pertinent measures of the distribution of material living standards are probably based on jointly considering the income, consumption, and wealth position of households or individuals.”

We find that there is a large overlap between the top and bottom of the two-dimensional distributions, identical to the twin peaks phenomenon seen in the mobility literature (e.g., Fisher and Johnson, 2006). In three dimensions, one in three households that are in the bottom wealth quintile are also in the bottom quintile of income and consumption. At the other extreme, one in two households that are in the top wealth quintile are also in the top quintiles of income and consumption.  Finally, the results indicate that inequality in two dimensions is growing faster than inequality in one dimension.

The results improve our understanding of inequality in the United States since 1989 by exploring the joint relationship between various measures of economic inequality. The results indicate that the correlation between the three measures is high but not perfect.  Therefore, the individuals who comprise the top in any one measure do not necessarily comprise the top in another. While there is stickiness at both the top and the bottom of individual measures, fluidity also exists, especially as the ranking of one measure relates to the ranking of another.  Therefore, the picture of inequality proposed here both aligns with previous research in that it is rising, but also improves the clarity by incorporating the relationship between various measures of economic well-being that comprise inequality.