Measuring the distribution of well-being : why income and consumption give different answers

Annual, before-tax income is the most common official statistic used to measure economic well-being and therefore underlies the design of most anti-poverty programs or other redistributive economic policies. Notwithstanding, extended income measures as well as consumption based measures are gaining increasing currency in scientific analysis of economic well-being. Our findings suggest that a consumption-based measure gives very different answers about relative economic standing across income and age groups, and somewhat different answers about trends in resources over time. More importantly, by explicitly measuring the relationship between income and consumption across groups and time, we are able to evaluate how differences in effective taxation, saving rates, and investment in consumer durables affect the alternative measures of economic well-being.