How inequality may be fuelling our obsession with luxury goods

Economic inequality is a global issue. Take the UK, for example. Despite improvements over the last century Office for National Statistics figures show that between April 2018 and March 2020 the wealthiest 10 per cent of households owned 43 per cent of all Britain's wealth, while the bottom half owned just nine per cent.

Yet perversely, in a COVID stricken world, where some 719 million people were surviving on less than $2.15 a day at the end of 2020, the global personal luxury goods market is proving remarkably resilient with sales set to reach some $320 billion in 2022 according to some estimates. 

In the UK, it's hard to escape the news that we are in the midst of a cost of living crisis; possibly the greatest squeeze on the incomes of millions for a century. 

Perhaps it is surprising to learn then, that even with household budgets tightening and discretionary spending under pressure, perceptions about status may result in people prioritising luxury goods over daily necessities. That what someone's work colleagues earn, or where an individual ranks in their firm's salary 'league table', may lead them to buy a designer watch rather than groceries, and even borrow money for the purpose.  

Wealth inequality is associated with a variety of negative social, health and economic outcomes, from higher rates of obesity and diabetes to lower life expectancy. But how and why inequality causes these problems is unclear.

One possible explanation is status anxiety. The idea being that greater wealth and income inequality tends to focus people's attention on their position in the social hierarchy and the stress of monitoring and improving this position, ie 'keeping up with the Joneses', which negatively impacts their lives.  

It's not easy to test this hypothesis, though. One potential route is to look at the relationship between income inequality and spending habits.

Status anxiety is associated with a tendency to devote more resources to acquiring 'positional' goods - goods that signal wealth and income, like luxury brands.

Essentially, greater inequality should lead to more luxury goods spending. The challenge has been finding the data to demonstrate this relationship at an individual level. However, new approaches that use the digital footprints people leave behind when they spend money electronically or engage with the internet make this possible. 

Together with my research colleagues we were able to combine payroll data from more than 680,000 people at 32,000 organisations with digitally-derived spending information for a 10-month period in 2019 to see how income inequality affected spending.

In particular, we looked at two dimensions of income inequality: the distribution of workers' salaries in the firm they work at (for this we used the Gini coefficient - a common measurement of inequality); and where a person's salary ranks compared to others in their firm.  

The results provide a compelling case for status anxiety being a contributor to the negative outcomes linked to income equality. They also highlight a troubling connection between income inequality and luxury goods spending. 

We found that, given the same salary and purchasing power, the higher the inequality in a workplace the greater the proportion of income spent on luxury goods - such as antiques, champagne, jewellery and artworks - rather than on discretionary items or necessities.

And the lower someone's salary is, the greater the effect. Here discretionary spending means items such as clothing, a meal out or a trip to the hairdressers, while necessities include groceries, medicines, heating and lighting.  

A similar effect occurs with salary ranking. People who are comparatively low ranked in their workplace appear to compensate by buying proportionally more luxury goods than people who are more highly ranked. This time the effect is strongest for higher salaries. 

The results should interest a number of stakeholders. For organisations that focus on mental health issues, for example, the findings suggest that, driven by anxieties about social status, income inequality may drive people to buy luxury goods at the expense of vital necessities and their wellbeing may suffer as a result.

For marketers the research identifies specific factors that influence consumer choices in situations of income inequality. And given that luxury goods spending may be funded by borrowing in these situations, lenders and other financial services firms will be interested from the perspective of both commercially appropriate and responsible lending. 

Organisations more generally should also take note. It is a common argument that executive salaries many multiples greater than the average employee's salary are a necessary product of free-market competition, a price that must be paid to attract and retain the best talent.

But our findings show that decisions on remuneration may have hidden consequences that indirectly effect employees' health, and thus firm performance, in a negative way. Moreover, it is not just the poorer, lower paid that are affected. When inequality is high everybody suffers to some extent if they are obsessing over what their colleagues are earning and buying.   

Which brings us to policymakers. Because these findings suggest that, as far as people's wellbeing is concerned, inequality, in and of itself, may well be harmful. This is highly relevant in a world where there is ongoing debate over the merits of trickledown economics and a focus on the distributional effects of taxation. Or where there are claims that levels of inequality matter less, so long as policies improve the living standards of the lowest paid – a 'rising tide lifts all boats' approach.  

Instead, it seems that while those at the top continue to accumulate wealth and add to their superyacht collections, many other lives are being holed beneath the waterline as they try to keep up. 

Further reading:

Muggleton, N. K., Trendl, A., Walasek, L., Leake, D., Gathergood, J. and Stewart, N. 2022. Workplace inequality is associated with status-signalling expenditure. Proceedings of the National Academy of Sciences of the United States of America, 119, 15, e2115196119.

Who punishes promiscuous women? Both women and men are prejudiced towards sexually-accessible women, but only women inflict costly punishment. Muggleton, N. K., Tarran, S. and Fincher, C. L. 2019
Evolution and Human Behavior, 40, 3, 259-268.

Naomi Muggleton is Assistant Professor of Behavioural Science and lectures on The Economics of Wellbeing on the Undegraduate programme.

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