Why are Households that Report the Lowest Incomes So Well-off?

an article by Mike Brewer (University of Essex; Institute for Fiscal Studies), Ben Etheridge (University of Essex) and Cormac O’Dea (Institute for Fiscal Studies) published in The Economic Journal Volume 127 Issue 605 (October 2017)

Abstract

We document that households in the UK with extremely low measured income tend to spend much more than those with merely moderately low income.

This phenomenon is evident throughout three decades worth of microdata and across different employment states, levels of education and marital statuses. Of the likely explanations, we provide several arguments that discount over-reporting of expenditure and argue that under-reporting of income plays the major role.

In particular, by using a dynamic model of consumption and saving, and paying special attention to poverty dynamics, we show that consumption smoothing cannot explain all the apparent dissaving.

Full text (PDF 26pp)

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