While food quality and the amount of money spent on food increases with your income, the overall proportion of your budget devoted to food spending becomes smaller. At the same time, when you have a higher income, you’re able to spend more money on items other than food. As your income rises, your spending on secondary purchases (such as video games, travel, or clothing) rises, as well. “You don’t need shoes to survive, but you need to eat,” Sean Snaith, director of the University of Central Florida’s Institute for Economic Forecasting, told The Balance by phone. “At the lowest income levels, income has to be spent on things that sustain life. If you have very little income, most of it will be spent on food,” he said. “As income goes up, you can afford other things you need.” For example, if your monthly income is $1,500, you may spend a third of it ($500) on food. But if your monthly income is $6,000, you won’t spend a third of it ($2,000) on food. You might spend $1000, or about a sixth of your income. The other $1000 is money you can spend on other necessities or on discretionary goods and services.
How Engel’s Law Works
Engel developed his economic theory by reviewing the various household budgets of European families—with a focus on Belgian households—during the mid-19th century. He observed a direct relationship between income and food consumption. As translated from German, he reported that the poorer a family is, “the greater…the proportion of the total outgo which must be used for food…The proportion of the outgo used for food, other things being equal, is the best measure of the material standard of living of a population.” Today, data on food and household spending shows that Engel’s observation is still accurate more than 150 years later. In a 2020 Consumer Expenditure Survey conducted by the U.S. Bureau of Labor Statistics, households with an income of $200,000 or more spent 9.7% of their income on food. But for households with an income of $15,000 or less, food made up 15% of their budget. For example, suppose your household income is $4,000 a month, and you spend half of that ($2,000) on food. If your income doubles to $8,000 a month, you likely won’t need to eat twice as much as you did before. So you won’t still spend half of your income ($4,000) on food. You might spend more money on buying nicer food or eating out more. But you won’t have to double your spending to do that. Most likely, the amount of money you spend on food will increase but not at the same rate as your income. “You can only eat or drink so much,” said Snaith. “There are only seven dinners in a week.” He explained that even when consumers spend more by buying higher-quality items—like grass-fed milk rather than powdered milk or prime beef instead of bologna—they’re not spending the same percentage of money on food as they would at lower income levels.
Engel’s Law Today
For more than a century, Engel’s Law has been used for many different kinds of economic analysis about how food consumption relates to wealth and well-being. It has been reevaluated and improved over the years. Today, it is still used by many economists. Among modern findings, economists found that food consumption at home and away from home is consistent with Engel’s Law. For example, the average U.S. household spends almost half of all food expenditures on food consumed away from home. This type of food purchase tends to be more expensive, which means it will make up a greater portion of the budget of a lower-income family. Other studies found Engel’s Law can indicate that lower-income families are more likely to spend money on cheaper, more starchy foods like rice, potatoes, and bread. As a result, when income increases, so does the demand for higher-quality food. By applying Engel’s Law, researchers also found that low-income families and countries feel the effect of price changes of food more than wealthy families or nations. Engel curves help describe how household spending on certain goods and services relates to income. They are used in economic analysis to measure structural change, growth, international trade, and inflation. Engel’s Coefficient is used to determine a country’s standard of living and set national poverty lines. The United Nations (UN) uses it to measure and reduce poverty worldwide.
