The inequality gap is increasing and so is conspicuous consumptionBy Wendy Philpott University Relations
Our very human tendency to want to "keep up with the Joneses" is as apparent today as ever. In fact, research shows that over the past decade, conspicuous consumption has intensified in developed economies.
While the impacts of economic inequality are complex, a negative social impact identified by a Waterloo graduate student is that it encourages consumer habits such as buying expensive clothing, cars, or personalized services at the expense of both essential consumption and savings.
Iuliia Nesterova, a PhD candidate in economics, has found that higher inequality is associated with more conspicuous consumption. Her research shows that people across income groups are spending more money on non-essential goods and especially services, regardless of their financial resources.
In her dissertation, Nesterova explores how consumer choices spurred by social comparisons - "keeping up with the Joneses" - encourages conspicuous consumption, which leads to excess borrowing and insufficient saving. Her research suggests that mitigating inequality can lower conspicuous consumption and consequently benefit everyone.
"I have always been intrigued by anecdotal evidence that relative consumption seems to matter to people," Nesterova says. "Yet standard economic theories do not incorporate the interdependent nature of individual preference over consumption. So, I started my dissertation research by looking at the data on household consumption to find evidence of conspicuous behaviour."
Her examination found that, empirically, inequality has had a significant effect on household consumer behaviour after 2010 - people in all income groups started spending more on goods and services.
Nesterova attributes historically low interest rates and the rise of social media as key factors in this trend. The former encourages more borrowing and buying, the latter normalizes the consumption of expensive products and services.
Importantly, she has found that the rise of the service economy - such as personal care, dinning out and other lifestyle services - is a significant contributing factor. To understand more about this transition in consumer behaviour, Nesterova looks at consumption as a dynamic process, including the role of social interaction and its pressures on individuals.
"If I care about my social standing," she explains, "I might be inclined to buy too much conspicuous items that others will see, to improve my position relative to them. But consuming more today to improve my relative social position, also weakens my relative economic position in the future. It becomes a question of a rat race today vs a rat race tomorrow."
Nesterova considers economic strategies that could help mitigate consumption inequality, such as more redistributive policies - sharing wealth across income groups. For instance, she found "the benefit of income taxes are particularly apparent through the lens of my research on conspicuous consumption. Redistribution from the rich to the poor may help both the poor and the rich via reductions in inefficient conspicuous consumption."
Considering the future of consumer economies in Canada and other developed countries, Nesterova anticipates a growing shift toward service economies. "If we implement the right policies, this shift can bring new opportunities and challenges to make sure that inequality is kept under control and innovation benefits all."
Hear more from Nesterova
Recently, Nesterova attended the Lindau Nobel Laureate Meetings and had the opportunity to meet 2021 Laureate Joshua Angrist to discuss what drew them into researching economics.