A consumer expenditure approach to estimating changes in the standard of living in the United States: 1984 to 1992

Abstract

This dissertation employs a consumer expenditure, rather than income or wealth, approach to assess economic well-being in the United States. The inspiration for this method of analysis derives from Amartya Sen's concept of capabilities and functionings. Capabilities represent the potential for a "full life" individuals face, given their financial resources, health, age and education. Functionings are a subset of capabilities actually achieved. The standard of living is estimated by traditional measures of economic well-being, such as income and wealth. However, to estimate functionings, the distribution of consumers' expenditures across an array of goods and services must be analyzed because of shortcomings inherent in income and wealth measures. For example, an individual with high income and/or wealth may exhibit high capabilities, yet have low functionings because of unusually high expenses for medical care. The Consumer Expenditure Survey (CES) is the data set employed to analyze changes in the functionings estimate of the standard of living. Macro issues such as real expenditure growth across the population and the size distribution of the middle class are analyzed as well as micro issues such as: child care expenditures across households, health care expenditures, luxury expenditures by the affluent and the "burden" of expenditures on essential goods and services across households. Descriptive statistics, single and Simultaneous-Equation Tobit (SET) as well as Almost Ideal Demand System (AIDS) and Enhanced AIDS models are employed to evaluate how a representative sample of Americans and various "socioeconomic groups" fared in terms of enrichment or retraction of their expenditures over the period 1984 to 1992. This dissertation contributes to the literature by evaluating Senian functionings by consumer expenditure measures, expanding Amemiya's (1974,1979,1985) Simultaneous-Equations Tobit model to a complete system of consumer behavior and broadening the AIDS model of Deaton and Muellbauer (1980a) to account for the impact of demographic characteristics on consumer expenditure patterns, which is referred to as the Enhanced AIDS model. The descriptive and analytical evidence indicate the following: (1) consumer expenditure measures reveal standard of living estimates that vary radically from earnings, income and wealth measures and (2) the enhancement of the AIDS model to account for demographic characteristics increases its explanatory power significantly.