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Consumption vs. Expenditure

  • Economics


Standard tests of the permanent income hypothesis (PIH) using data on nondurables typically equate expenditures with consumption. However, as noted by Becker (1965), consumption is the output of a home production' function that uses both expenditure and time as inputs. With this in mind, we revisit the retirement consumption puzzle by documenting that the dramatic decline in expenditures at the time of retirement is matched by an equally dramatic rise in time spent on home production. The innovation of our paper is that we empirically disentangle changes in actual consumption from changes in expenditures. To do so, we use a novel data set which collects detailed food diaries for a large cross-section of U.S. households. We show that despite the decline in food expenditures, neither the quantity nor the quality of food intake deteriorates with retirement status. However, unemployed households experience a decline in consumption commensurate to the impact of job displacement on permanent income. Taken together, the results on retirement and unemployment highlight how direct measures of consumption distinguish between anticipated and unanticipated shocks to income, while using expenditure alone obscures this difference and leads to false rejections of the PIH.

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