Will Wilkinson defends the notion of separate price indexes for the poor and the rich. I don’t have a problem with that per se. The point I tried to make in my previous post concerns its relevance for our assessment of how much inequality has increased.
In his original post on this, Wilkinson writes “If you think economic inequality matters, that’s because you think relative economic well-being matters. If you think economic well-being matters, then what you care about is consumption, not income.” I disagree. We should care about inequality of income not simply because it contributes to inequality of well-being, but also because it contributes to inequality of capability.
Even if consumption inequality has increased only a little, the rise in income inequality has produced a noteworthy increase in inequality of capability. The rich aren’t forced to purchase goods and services whose prices have increased more rapidly; they could switch to the same consumption bundle as the poor if they wished.
In my view the Broda and Romalis analysis is important for our understanding of (absolute) poverty, rather than inequality. They find that the prices of goods poor Americans tend to purchase have risen less rapidly than the overall inflation rate. I can’t assess whether they’ve accurately analyzed the data and how much measurement error the data contain. But if the finding is correct, it suggests that the trend in living standards for America’s poor was more favorable (or less unfavorable) between 1994 and 2005 than income data imply.