On measuring income standards

How do you measure living standards? The usual way is to look at income, because it is the easiest to find. But of course, this only pertains to market income and does not include other potential forms of income, such as informal income, income in goods, and imputed income from home production. All these can be important for poor households, and a better way may be to look at consumption, especially if you want to look at a proxy for permanent income rather than a temporary measure like income.

Mike Brewer and Cormac O'Dea do this for the United Kingdom. They show that the correlation between income and consumption is actually quite low, and defining poverty with income measures can be quite misleading, and they suggest this is due to underreporting of income while consumption expenditures are rather accurate, at least for the poor. This implies that if one looks at consumption expenditures to identify the poor, one should not focus so much on retirees. Indeed, they enjoy substantial housing services, need to sustain fewer people and can draw on the sale of assets. Absent a measure of consumption, using income plus imputed income from housing services does a good job, though.