EQUIVALENCE SCALES, WELL-BEING, INEQUALITY, AND POVERTY: SENSITIVITY ESTIMATES ACROSS TEN COUNTRIES USING THE LUXEMBOURG INCOME STUDY (LIS) DATABASE

The Luxembourg Income Study (LIS) database on which this article is based offers researchers exciting new possibilities for international comparisons based on household income microdata. Among the choices the LIS microdata allows a researcher, e.g. income definition, income accounting unit, etc., is the choice of family equivalence scale, a method for estimating economic well-being by adjusting income for measurable differences in need.
The range of potential equivalence scales that can and are being used in the ten LIS countries and elsewhere to adjust incomes for size and related differences in need span a wide spectrum. The purpose of this paper is to review the available equivalence scales and to test the sensitivity of various income inequality and poverty measures to choice of equivalence scale using the LIS database. The results of our analysis indicate that choice of equivalence scale can sometimes systematically affect absolute and relative levels of poverty; and inequality and therefore rankings of countries (or population subgroups within countries). Because of these sensitivities, one must carefully consider summary statements and policy implications derived from cross-national comparisons of poverty and/or inequality.     

THE NON-CONSTANCY OF EQUIVALENCE SCALES

Comparisons of households of differing composition are usually achieved through the use of equivalence scales. It is well known that the choice of scales can have considerable impact on the conclusions drawn from studies of welfare and poverty. There is a considerable literature on the theoretical issues relating to equivalence scales, but applied work on income distribution and related areas almost invariably takes scales to be constant irrespective of income. This paper focuses on the relation of scale to income, by applying theoretical analysis to some simple household types. The conclusion is that scales are not constant and that current practice should be changed.     

Equivalence Scales in an Intertemporal Setting with an Application to the Former West Germany

Equivalence scales provide answers to questions like how much a household with two children needs to spend compared to a couple to attain the same welfare level. These are important questions for child allowances, social benefits and to assess the cost of children over the life-cycle for example. We discuss equivalence scales in an intertemporal setting with uncertainty. To estimate equivalence scales we use a panel from German households (GSOEP) containing subjective data on satisfaction with life and satisfaction with income to represent the welfare level. Because satisfaction is measured on a discrete scale we use limited dependent variable models for panel data in estimation. Using satisfaction with life data we find that larger households do not need any additional income to be as satisfied as a couple. Using satisfaction with income, however, yields equivalence scales that increase with household size.     

USING FUNCTIONINGS TO ESTIMATE EQUIVALENCE SCALES

Equivalence scales are used to enable welfare comparisons across heterogeneous households. In this paper, we propose to use the achievement of a certain level of functioning as the identifying assumption for the derivation of equivalence scales. This will allow us not only to deal with welfare comparisons between households of different size and composition, but will also enable us to incorporate other characteristics (such as location and employment status) in the creation of equivalence scales for welfare comparisons. The paper applies this approach to create equivalence scales for the functioning “shelter” using Belgian and Italian data. The analysis shows that the income differences associated with different characteristics only play a small role in explaining differences in functionings. An important policy message is therefore that compensating people for functioning shortfalls in monetary terms may not be sensible.     

RELATIVE INEQUALITY AND POVERTY IN GERMANY AND THE UNITED STATES USING ALTERNATIVE EQUIVALENCE SCALES

We use data from the Luxembourg Income Study to show the sensitivity of measures of relative economic well-being of persons in the U.S. and Germany using official equivalence scales and consumption-based country-specific equivalence scales developed for the two countries. Overall inequality and poverty levels are found not to be sensitive to the equivalence scale used. However, the official German equivalence scale yields quite different results from the others with respect to the relative income and poverty levels of vulnerable groups within the population, especially older single people.     

Income Inequality in Australia in an International Comparative Perspective

Earlier comparative work on income distribution has tended to suggest that Australia is characterised by less income inequality than other industrialised economies. Concerns about the quality of the Australian data used in such comparisons have led to the need for more detailed assessment of the situation. The Luxembourg Income Study has been a focus for this work by bringing together microdata sets for a range of countries and reorganising them to conform to standardised concepts and definitions. This paper builds on earlier work undertaken as part of the Luxembourg Income Study by including Australia in an international comparative analysis of income distribution and redistribution. The Australian data are those from the 1981–82 Income and Housing Survey, with income tax imputed onto the data file. Results are presented for the gross and net income distributions between both families and individuals in seven countries. A common set of equivalence scales is also used to adjust for differing family needs. The results indicate that, using several summary measures of inequality, the distribution of income in Australia is less equal than in four of the other six countries studied. Earlier research which placed Australia high on the international league table of income equality is thus not confirmed by the results.     

THE SENSITIVITY OF INCOME INEQUALITY TO CHOICE OF EQUIVALENCE SCALES

To account for the fact that a household's needs depend on its size and composition most studies on income inequality adjust the observed household incomes by equivalence scales. However, since the rationale for choosing a specific scale is rather vague the importance of testing the sensitivity of income inequality estimates to choice of equivalence scales has long been acknowledged. The sensitivity studies in the literature are restricted to equivalence scales that do not depend on the income level of the reference household which means that the effect of a rise in the household size on the scale rate does not depend on whether the household is poor or rich. By using Norwegian micro-data it is shown that the introduction of an income-dependent scale produces results that are in conflict with the widespread view of robustness of results to choice of equivalence scales.     

HOUSEHOLDS, GOODS, AND WELL-BEING

Household economies translate goods into well-being through production, co-operation, and distribution. Between market goods to households and well-being to persons, value is added. Income is a measure of goods, consumption well-being is measured by equivalent income. An absolute interpretation of equivalent income is argued as the value to persons of consumption well-being after household economies. Guidance is suggested on the choice of equivalence scales, and for the measurement of well-being and inequality.     

DOMINANCE TESTING OF TRANSFERS IN ROMANIA

In this paper we compare the progressivity of different government transfers made to households in Romania. We use distribution free standard errors to examine the difference between concentration curves that may be correlated, and thereafter employ statistical tests that take into account the covariance matrix for the ordinate estimates. In addition, we estimate extended Gini coefficients for the same transfers to check their consistency with the tests of inequality dominance. The results show that almost all transfer payments in Romania are progressive, and that they have an important effect on the distribution of income. Rankings among different transfer payments are, however, not robust. In particular, sensitivity analysis using different household equivalence scales indicates that many results are not consistent across scales, and that lower size elasticities contribute to changes in ranking of Ginis and loss of statistical significance in dominance tests.     

RANKING INCOME DISTRIBUTIONS WHEN NEEDS DIFFER

We derive criteria for ranking income distributions where households differ in equity-relevant non-income characteristics ('needs'). using methods which do not require cardinal specifications of equivalence scales. We consider comparisons for situations where the distributions of needs differ (eg. Cross nationally or intertemporally), building on the results of Atkinson and Bourguignon (1987) and Atkinson (1992). The modifications required when the individual rather than the household is the income-receiving unit are also discussed. We illustrate the methods with an analysis of changes in social welfare and poverty in the U.K. between 1981 and 1986.     

DATA SOURCES ON INCOME DISTRIBUTION IN BANGLADESH, INDIA, PAKISTAN AND SRI LANKA: AN EVALUATION

This paper examines the data base available in four South Asian countries, India, Pakistan, Bangladesh, and Sri Lanka, for the examination of trends in real inequality and poverty. Taking the position that sample surveys of household income and consumption are the only really adequate bases on which size distributions of income for a less developed country can be constructed, the paper examines in Section I the reliability of the surveys available in the four countries. Section II evaluates available price data. Section III looks at directions for future development of data collection. The conclusion is reached that sample surveys regularly conducted in these countries do not provide a particularly good basis for this type of analysis. Needed alterations include permitting access to the primary data (or redesign of published tabulations to meet the needs of this type of analysis), use of per capita rather than total household income and consumption, better coverage of regions and occupations, and exploitation of the price data implicit in the survey data collected. Further, the surveys themselves need to be overhauled, especially with regard to timing of interviews. The paper concludes with a short discussion of alternatives to estimates of inequality that can be used to measure absolute deprivation, such as the QUAC stick for identifying nutritional insufficiency.     

GENERATING INTERNATIONALLY COMPARABLE INCOME DISTRIBUTION DATA: EVIDENCE FROM THE FEDERAL REPUBLIC OF GERMANY (1974), MEXICO (1968) AND THE UNITED KINGDOM (1979).

In this article an attempt is made to generate internationally comparable income distribution data for the Federal Republic of Germany (1974), Mexico (1968) and the United Kingdom (1979). To that end, the same income concept and income unit were adopted for each country, i.e. respectively household available income and the household. Moreover, incomes from various sources were adjusted for inconsistency with National Accounts according to Altimir's methodology. The paper finds that the distribution of persons by household income per equivalent unit is probably the best way of looking at the distribution of economic welfare. It further demonstrates that the distribution of persons by household available income per capita is much closer to this 'ideal' distribution than the distribution of households by household available income. Finally, the paper discusses some of the problems arising from the fact that one normally works with grouped data. It is found that in the case of the three countries under study, grouping is likely to have had only a small impact on the results.     

NONCASH INCOME, EQUIVALENCE SCALES, AND THE MEASUREMENT OF ECONOMIC WELL-BEING

Little attention has been paid to the importance of consistency between the specifications of the income and the equivalence scales used in measuring economic well-being when noncash income is included in the definition of income. This article finds that inconsistency between the income and needs sides of a comparison can be important when some types of noncash income are included. An upward bias in the measured economic status of the aged when Medicare is included in income and an ordinary equivalence scale is used is presented as an example of the important effects of this consistency problem.     

Bounding Lifetime Income Using A Cross Section Of Data

Measures of income inequality based on current income are well known to overstate lifetime income inequality for two reasons: intracohort mobility and the shape of the age-earnings profile. Utilizing the concept of age equivalence scales along with varying assumptions concerning the extent of intracohort mobility, the method presented bounds lifetime income inequality using only cross-sectional data from the CPS, 1967–86. As a result, we are able to analyze changes in lifetime inequality over this period.     

MEASUREMENT OF POVERTY: POLAND IN THE 1980s

This paper presents results of an examination of poverty in Poland in the 1980s. The individual welfare measure is expenditure on consumption per equivalent adult. Household equivalence scales are estimated using a quasi-exact scales trans logarithmic model. Four poverty indices are calculated. These are intended to capture the following aspects of poverty: (1) incidence, (2) relative deprivation, acid (3) social ability to eliminate poverty by income transfers. The study revealed significant changes in poverty during the investigated period, from 9 to 30 percent with persistent poverty resulting for pensioners, farmers and low educated persons.     

Reference Income Effects in the Determination of Equivalence Scales Using Income Satisfaction Data

We estimate household equivalence scales, i.e. the needs of additional adults and children relative to a single adult, using income satisfaction data from the German Socio‐Economic Panel. We extend previous studies applying this approach by taking reference income into account. This allows separating needs‐based from reference effects in the determination of income satisfaction. We show that this adjustment helps to overcome a bias causing an overestimation of adults’ and an underestimation of children’s needs‐based equivalence weights. Our results indicate that controlling for income comparisons substantially increases children’s equivalence weight relative to that of adults.     

AN EXAMPLE OF THE USE OF STATISTICAL MATCHING IN THE ESTIMATION AND ANALYSIS OF THE SIZE DISTRIBUTION OF INCOME*

This paper focuses on the use of statistical matching in the estimation and analysis of the size distribution of family unit personal income. The paper begins with a brief discussion of data on the size distribution of income in the U.S. and their limitations. Several methods of improving or augmenting those data are described, and earlier examples of statistical matching for that purpose are mentioned. A brief summary of the types of statistical matching methods which have been used is also presented. Then a recent example of statistical matching carried out at the Office of Research and Statistics, Social Security Administration, is described, and the effects on the size distribution of adjusting and augmenting the initial data using the statistically matched data from that example are shown. Material relating to the accuracy of that statistical match is presented in the appendix.     

Estimating inequality in the distribution of welfare using demand models

In this paper two demand models with general household equivalence scales (GES) are estimated. These GES are identifiable, since they have the independence of base utility (IB) or equivalence scales exactness (ESE) property. Estimates of household characteristics adjusted income can then be calculated relative to a specific household type. This “individual equivalent income (IEI) is then used to calculate measures of inequality in the distribution of welfare. As more than one model is estimated, the sensitivity of these estimates to model specification changes can be considered. Comparisons are also made to estimates of inequality based on household income. It is found that absolute inequality is sensitive to model specification, but relative inequality is not. This is true using indices of inequality of the Atkinson (1970), Kolm (1976a,b) and Sen (1973) type, or more general measures of inequality based on estimates of Lorenz curve decile ordinates, constructed using methods introduced by Beach and Davidson (1983). Thus, if absolute measures of inequality are required, these results suggest some further research is required to determine a class of models which is less sensitive to model specification error. However, if only relative measures of inequality are needed, then estimates of inequality appear to be very robust to the choice of model specification.     

THE ESTIMATION OF PENSIONER EQUIVALENCE SCALES USING SUBJECTIVE DATA

This paper uses panel data on pensioners' subjective evaluations of their financial positions to construct equivalence scales for pensioners. A pensioner couple is estimated to require an income 44 percent higher than a comparable single pensioner to reach the same standard of living. This is significantly less than the equivalence scale value implied by the ratio of state pension rates, the McClements equivalence scale value, and the scale value derived from Engel curve estimation for food expenditure using the same data source. The estimated equivalence scale value is robust to variations in the definition of the pensioner sample, the measurement of income, and the econometric model used.     

THE ESTIMATION OF PENSIONER EQUIVALENCE SCALES USING SUBJECTIVE DATA

This paper uses panel data on pensioners' subjective evaluations of their financial positions to construct equivalence scales for pensioners. A pensioner couple is estimated to require an income 44 percent higher than a comparable single pensioner to reach the same standard of living. This is significantly less than the equivalence scale value implied by the ratio of state pension rates, the McClements equivalence scale value, and the scale value derived from Engel curve estimation for food expenditure using the same data source. The estimated equivalence scale value is robust to variations in the definition of the pensioner sample, the measurement of income, and the econometric model used.