Beyond Engel’s Law - Pursuing an Engelian Approach to Welfare: A Cross Country Analysis

Abstract

Engel’s law is known to be extraordinarily consistent across time and space. Accordingly, it has been widely used to determine poverty. However, also among the poorest, a certain amount of non food spending is necessary. To substantiate the distinction between necessities and luxuries, already Ernst Engel (1895) approached a behaviorally founded comprehensive assessment of structural changes in consumer expenditures. To build upon Engel’s legacy and to complement the scare empirical literature, a behavioral approach is applied. It is conjectured that differences in satiation patterns of universally shared needs translate, on the aggregate level, into different shapes of Engel curves and thus also into different income elasticities of demand. Utilizing a nonparametric regression technique, it is explored whether and which expenditure categories change systematically with rising income. In line with the theoretical expectations, a number of empirical regularities in consumer expenditure patterns can be identified that go well beyond Engel’s law.