What Is Engel's Law?

What Is Engel's Law?

Let me explain Engel's Law to you directly: it's an economic theory from 1857 by German statistician Ernst Engel, stating that as your household's income goes up, the percentage you spend on food drops, while you put more toward things like education, recreation, extra amenities, and building wealth.

How Engel's Law Affects Household Spending

Back in the mid-19th century, Ernst Engel studied Belgian families' expenditures, grouping them as 'on relief,' 'poor but independent,' and 'comfortable.' He analyzed their spending on food, clothing, housing, education, recreation, and more.

What he found was clear: poorer groups devoted a bigger chunk of their budget to food and less to clothing and education.

This became known as Engel's Law. Translations into English put it this way: 'The poorer a family, the greater the proportion of its total expenditure that must be devoted to the provision of food.' Or, 'The poorer is a family, the greater is 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.'

Applied to nations, it means that as a country gets wealthier, it shifts less labor and capital to food production and more to manufacturing and services, building a more advanced economy.

In 2023, the average U.S. consumer spent 11.2% of disposable income on food.

The Relevance of Engel's Law in Modern Economics

Engel's Law is still a key principle in economics today, underpinning many global economic and social policies, including anti-poverty programs.

In the 20th and 21st centuries, spending has grown to include cars, health insurance, and mobile phones. Once food is covered, families can invest in education and other areas that enhance financial security and wealth.

Practical Illustrations of Engel's Law

Consider this example: a family earning $50,000 a year spends 25% on food, that's $12,500. If their income doubles to $100,000, they won't likely spend $25,000 on food—maybe a bit more than before, but not proportionally.

As the late MIT economist Paul A. Samuelson noted in his textbook Economics: 'As income increases, expenditures on many food items go up. People eat more and eat better. They shift away from cheap, bulky carbohydrates to more expensive meats and proteins—and to milk, fruit, vegetables, and labor-saving processed foods. There are, however, limits to the amount of money that people will spend on food when their incomes rise.'

What Is an Engel Curve?

An Engel Curve is simply a graph that shows Engel's Law in action, plotting the link between household income and spending on a specific good or service.

What Is Engel's Coefficient?

The Engel coefficient, drawn from Engel's Law, measures a nation's standard of living. Some countries use it for poverty lines. You calculate it by dividing food expenditures by total expenditures.

What Is Income Elasticity?

Income elasticity of demand measures how demand for a product or service increases with income. Luxury items have higher elasticity than normal goods like food. Inferior goods see demand drop as income rises.

Why Is the Percentage of Income Spent on Food a Good Measure in Economics?

Economists use the food spending percentage as a solid indicator of financial security. Since nutritional needs are similar for everyone, the absolute cost of food is comparable across incomes. A high percentage signals potential financial insecurity, though it's not perfect—wealthy people can spend extravagantly on dining.

The Bottom Line

To wrap this up, Engel's Law says that as a household's or nation's income rises, the food spending percentage falls, with more going to other goods and services. Developed by Ernst Engel in the mid-19th century, it continues to influence economics and public policy.