Engel's law 

is an economic relationship proposed by the statistician Ernst Engel in 1857. Even

though Engel's law was proposed roughly 160 years ago, it holds relevance today in the context of
poverty, especially the reduction of poverty. For instance, the lines and rates for national poverty are
often determined by the food share of household expenditure.[1]
One definition of Engel's law by the Merriam-Webster dictionary is as follows: "a generalization in
economics: such as family income increases, the percentage spent for food decreases, that spent
for clothing, rent, heat, and light remains the same, while that spent for education, health, and
recreation increases" [2]
A quotation of Engel himself from 1932 reveals the same relationship between income and
percentage of income spent on food, but also indicates the application of Engel's Law in measuring
standard of living: "The poorer is a family, the greater is the proportion of the total outgo [family
expenditures] 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." [1]

Contents
1Understanding Engel's law
2Engel curve
3History of Engel's law
4Implication today
5See also
6References

Understanding Engel's law[edit]

Engel's law states that an increase in the income of a family decreases the proportion of which the
income is spent on food, even though the total amount of food expenditure is increasing. In other
words, the income elasticity of demand of food is between 0 and 1. For instance, a family with a
$5000 monthly income is spending $2000 on food - which is 40%. Say the income of this family
would increase by 40% - to $7000. In this case they would spend around $2500 on food. So,
although the absolute expenditure on food would increase by 25%, the relative proportion would
decrease by 35.7%.[3] This example clearly shows the notion supported by Engel's Law, which is that
households with lower income will spend a larger amount of their income on food items than the
ones in the middle- or higher-income levels. For a poor family, the budget expenditure is a big
portion of their total budget, while the rich tend to spend more of their money on items such as
entertainment and luxury goods. To be clear, Engel's law does not imply that food spending remains
unchanged as income increases; instead, it suggests that consumers increase their expenditures
for food products in percentage terms less than their increases in income. [4][5] The interaction
between Engel's law, technological progress, and the process of structural change is crucial for
explaining long-term economic growth as suggested by Leon,[6] and Pasinetti.[7]

Engel curve[edit]
A concept which is based on Engel's law is Engel curve. This curve shows how the spending on a
certain good varies by either the proportion or absolute dollar amount. The shape of the curve
depends on factors such as age, gender, educational level and which type of good it is visualising.
Moving along the curve assumes that these factors are held constant, ceteris paribus, while only
income is changed. Logically, when demographic factors change, the Engel curve shifts accordingly.
Moreover, Pope (2012) notes that larger families will have higher food consumption, as well as that
consumption expenditures change throughout a life cycle, even holding income and other
demographic variables are held constant. The share of a budget spent on food rise and then fall
during a lifetime, producing an inverted parabola, indicating that expenditures on food as well as
total expenditures peak during mid-life.[8]
With income level as the x-axis and expenditures as the y-axis, the Engel curves show upward
slopes for normal goods, which have a positive income elasticity of demand. Inferior goods with
negative income elasticity, assume negative slopes for their Engel curves. In the case of food, the
Engel curve is concave downward with a positive but decreasing slope.[9][8] Engel argues that food is
a normal good, yet the share of household's budget spent on food falls as income increases, making
food a necessity.[4][8]

Another example of Engel's law

History of Engel's law[edit]

In 1857, by using data from several households, Ernst Engel found that household food
expenditure and household income are correlating. The relationship between food share of
household expenditure and household income was also highly consistent. The income elasticity for
food expenditure was inelastic, below 1 (around .86) for each gathered dataset, meaning it is
insensitive to price changes.[10]
By 1875 Engel's law had spread across the Atlantic to Europe. There it gained attention and was
used by Carroll D. Wright, which did not only argue that food expenditure was the only thing that
varied with income, but that in fact clothing, housing and sundries (meaning expenditures that are
not frequently incurred, like home improvement items) also varied with income in agreement with
Engel’s law.[11]
In 1932 Zimmerman stated that Engel's law had been utilised for other factors than income to food
expenditure, which should not be the practice. He states: "It is evident that Engel's law, rigidly
interpreted is not true for particular families, for particular times, and under certain
circumstances" and "The 'Engel' type of standard of living applies to no more than half of the people
of the globe." Zimmerman argues that the reason for this is among other things personal tastes,
family size and cultural preferences.[12]
In a review by Houthakker in 1957, the household incomes and elasticities on food, clothing and
miscellaneous items are further investigated, by looking at 40 households from 30 countries. The
elasticities are found to be similar to Engel's law, not equal. Based on this research, Houthakker
claims that "If no data on the expenditure patterns of a country are available at all, one would not be
very far astray by putting the partial elasticity at 0.6 with respect to food."[13]
Since then, researches on patterns concerning food expenditure have mainly become empirical
using sophisticated statistical models. This is in part made possible due to the ever-increasing
amount of data available. It is today quite common to simultaneously analyse how different types of
expenditures change along with household income or total expenditure. In the 21st century there
have been relatively few cross-national studies of the extent to which Engel's law remain relevant.
However, a study by Richard Anker in 2011 showed "convincing evidence [...] that Engel's law
continues to be relevant today across countries as well as across households within countries", but
he also draws the conclusion that Engel's law today is only sufficiently strong to predict differences in
food shares of countries that have large enough differences when it comes to income per capita.[14] It
is important to note that currently researchers assume an income elasticity of food being less than
1.0 (but more than 0.0), which further implies that the share of household expenditure on food
decreases with rising income.[1][8] Therefore Engel's law is a commonly accepted economic
relationship and often referred to in the introductory sections of academic papers.[1][9][13][10][8]

Implication today[edit]
Engel's law can be used as an indicator when looking at standards of living in various countries. For
that purpose a measure called Engel coefficient is used, which is simply a food budget share at a
point in time.[8] A country that would be poor and have a lower standard of living would have a high
Engel coefficient, whereas a country with higher standards of living would have a lower Engel
coefficient. The Engel coefficient is used for this purpose by The United Nations (UN), where a
coefficient above the 59th percentile represents poverty, 50-59% represents a state where daily
needs barely are met, 40-50% a moderately well-off standard of living, 30-40% a good standard of
living and below 30% a wealthy life.[15]
Inferring well-being from budget share for food. Based on Engel's empirical findings that the
share of budget spent on food falls with rising income, suggests that economic growth (and with it
rising incomes in the population) is a solution to malnourishment.[8] Using the Engel coefficient
countries can set national poverty lines,[1] where the most common measure is to divide the cost of a
nutritious diet by the Engel coefficient.[8] In his paper Pope (2012) illustrates that convergence
between food budget shares between rural and urban regions have been used to reflect standards
of living.[8]
Food's budget share as indicator of changes in real income. Hamilton (2001) interprets Engel's
law and suggests that movements in the percentage of budget share spent on food may serve as an
indicator of changes to the real income. In his paper, Hamilton (2001) measures the inconsistency of
the real income inferred from changes to food budget shares with the real income measured directly
and proceeds to estimate the bias in CPI.[16] Food functions as a good indicator of inflation as its
income elasticity is sufficiently different from 1.0; food is not durable, implying that expenditure on
food is essentially equal to consumption; food is easy to separate from other goods in consumers'
utility functions, and lastly food is a good easy to define.[16]
Agricultural sector shrinks as a percentage of total economic activity as a country
grows. Engel's law implies that when a country grows, the agricultural sector will constitute a smaller
percentage of the country's economic activity. This is due to the fact that the share of income spent
on food decreases as income itself increases (from economic growth).[8] Poper (2012) illustrates on
the U.S. that the share of workers in the agricultural sector fell from 41% in 1900 to less than 2% in
2000.[8] This phenomenon is reflected in the fact that more developed economies have lesser
proportion of the workforce in the agriculutral sector.[8]
Increases in agricultural prices affect the poor disproportionately. From the Engel's law it is
evident that food constitutes a large proportion of the budget of the poor, and therefore changes in
related prices have a larger impact on the poor than on the rich.[8] Policies which raise agricultural
prices will reduce real incomes of the poor proportionately more than they will reduce the incomes of
the rich.