What Is Engel's Law

Engel's Law is an economic theory introduced in 1857 by Ernst Engel, a German statistician, stating that the percentage of income allocated for food purchases decreases as income rises. As a household's income increases, the percentage of income spent on food decreases while the proportion spent on other goods (such as luxury goods) increases.

Key Takeaways

  • Engel's Law is a 19th century observation that as household income increases, the percentage of that income spent on food declines on a relative basis.
  • This is because the amount and quality of food a family can consume in a week or month is fairly limited in price and quantity.
  • As food consumption declines, luxury consumption and savings increase in turn.

Understanding Engel's Law

In the mid 19th century, Ernst Engel wrote, “The poorer a family, the greater the proportion of its total expenditure that must be devoted to the provision of food.” This was then extended to whole countries by arguing the richer a country, the smaller the food share

Engel's Law similarly states that lower income households spend a greater proportion of their available income on food than middle or higher income households. As food costs increase, both for food at home (such as groceries) and food away from home (for example, at a restaurant), the percentage spent by lower-income households is expected to increase.

The relationship and importance of household income to food consumption is well engrained in popular economics principles today, particularly with population health and improving the quality of health a prominent rallying point of all developed markets.

The very poor might spend as much as one-half of their income on food, so their budgets can be said to be food-intensive, or specialized.

Engel's seminal work was a bit ahead of its time back then. However, the intuitive and deep empirical nature of Engel’s Law helped spark intellectual leaps and bounds in the study of income to food consumption patterns. For instance, with food expenditure making up a larger part of the poor’s budget, this implies that the poor are also less diversified in their food consumption than those of more affluent consumers. Relatedly, within the food budget, cheaper, more starchy foods (such as rice, potatoes, and bread) are likely to be predominant for the poor, leading to less nutritious, less diversified diets

Example

For example, a family that spends 25% of their income on food at an income level of $50,000 will pay $12,500 on food. If their income increases to $100,000, it is not likely that they will spend $25,000 (25%) on food, but will spend a lesser percentage while increasing spending in other areas.