Measuring the Well-Being of the Poor Using Income and Consumption (WP-02-14)
Bruce D. Meyer and James X. Sullivan
We examine the relative merits of consumption and income as measures of the material well-being of the poor. Consumption offers several advantages over income because consumption is a more direct measure of well-being than income and is less subject to under-reporting bias. Measurement problems with income are problematic for analyses of changes in well-being of the poor because the biases appear to have changed over time and are correlated with government policies. On the other hand, income is often easier to report and is available for much larger samples, providing greater power to test hypotheses. We begin by considering the conceptual and pragmatic reasons why consumption might be better or worse than income. We then employ several empirical strategies to examine the quality of income and consumption data. First, we compare income and consumption reports for those with few resources, as well as their assets and liabilities, to examine measurement errors and under-reporting. Second, we examine other evidence on the internal consistency of reports of low income or consumption. Third, we compare how well micro-data in standard datasets weight up to match aggregates for classes of income and consumption that are especially important for low-resource families. Fourth, we validate income and consumption measures by comparing them to other measures of hardship or material well-being. Although the evidence tends to favor consumption measures, our analyses suggest that both measures should be used to assess the material well-being of the poor.
Bruce D. Meyer, Department of Economics, Northwestern University