The Engel Coefficient, or Engel's Law, is a statistical theory that states that, ideally, as income rises, the percentage of income that is spent on food decreases.
This theory is based on the observation that a well-off household which sees their income double is unlikely to also double their spending on food (although they may increase it slightly due to the added wealth). For example, if an individual earns $100 a week in income and they spend $50 on food a week (which would be 50% of the income), the Engel Coefficient states that if they're income was increased to $150 a week, they would not spend over $75 on food (50% of the new income).
If it is found that the individual/household is spending the same percentage on food despite the income increase, the individual/household has a budgetary issue.
- The theory is named after the statistician Ernst Engel, who was the first to investigate the relationship between income and spending on food in 1857.
- Engel’s law can be used as an indicator of living standards in different countries. If the Engel Coefficient (percentage of income used to buy food) is high, it means the country is poorer and has a lower standard of living (as they can not spare money to spend on other things).
- The United Nations uses the Engel Coefficient to show living standards:
- A coefficient above 59 percent represents poverty
- 50-59 percent, indicates barely meeting daily needs
- 40-50 percent, a moderately well-off standard of living;
- 30-40 percent, a well-to-do standard of living;
- below 30 percent, represents a wealthy life.