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.     

A CROSS-COUNTRY STUDY OF EQUIVALENCE SCALES AND EXPENDITURE INEQUALITY ON UNIT RECORD HOUSEHOLD BUDGET DATA

Inequality comparisons require equivalence scales to account for differences in household size and composition. The multiplicity of equivalence scale models makes the sensitivity of the inequality calculations to the scale used a significant policy issue. Such an investigation based on unit records of two adult households from Italy, Australia, South Africa, Thailand, Peru, Philippines, India and Tanzania was our principal motivation. The equivalence scale varies across countries and between different types of children. Inequality rankings of countries, though not the inequality decomposition between households of different composition, are robust to the equivalence scale used.     

COMPARISON OF ALTERNATIVE TAX AND TRANSFER TREATMENT OF CHILDREN USING ADULT EQUIVALENCE SCALES

This paper estimates adult equivalence scales in the context of a nonlinear demand system using cross-section individual household data. It then evaluates the treatment of children under the tax allowance and child benefit systems on the basis of the estimated equivalence scales. The results suggest that a child benefit system allowing for economies of scale in the family is consistent with the cost of children implied by the notion of adult equivalence scale.     

HOUSEHOLD NEEDS AND POVERTY: WITH APPLICATION TO SPAIN AND THE U.K.

We examine the sensitivity of U.K.-Spanish poverty comparisons to variations in the dependence of equivalence scales on household size and composition, using evidence from national household budget surveys. We sum up these comparisons using subjective confidence levels. Taking into account the dissimilarities in the distribution of incomes and needs across countries, we find, inter alia , that although the poor are typically more numerous in Spain than in Britain, the actual headcount differences may vary by up to 10 percent of the population when needs allowances are altered, even when kept the same across the two countries. Comparisons of poverty composition across the two countries are also very sensitive to the choice of equivalence scale parameters. Generally, however, the proportion of single adults among the poor is much less important in Spain than in Britain, the reverse being true for households with three or more adults.     

EQUIVALENCE SCALE SENSITIVITY OF POVERTY STATISTICS FOR THE MEMBER STATES OF THE EUROPEAN COMMUNITY

Using microdata from Household Budget Surveys of the Member States of the European Community, this paper examines the sensitivity of poverty statistics with respect to the choice of the equivalence scale. The results show that the ranking of the countries with respect to the overall poverty incidence is hardly affected when different equivalence scales are used. However, the composition of the poor population shows considerable changes when e.g. subjective equivalence scales are used instead of the OECD equivalence scale. The poverty incidence among specific household groups, such as single elderly and households with children, is particularly sensitive to the choice of the equivalence scale.     

Properties of Equivalence Scales in Different Countries

Recent studies in industrialized countries have shown that equivalence scales are income-dependent. We investigate whether this dependence also holds in poorer, services oriented countries, by considering the case of Cyprus. We also examine whether household economies of scale and relative children costs differ from those found for industrialized countries.     

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.     

EQUIVALENCE SCALES AND THE WELFARE OF CHILDREN: A COMMENT ON “IS THERE BIAS IN THE ECONOMIC LITERATURE ON EQUIVALENCE SCALES?”

In a recent issue of this journal, M. Luisa Ferriera, Reuben C. Buse, and Jan-Paul Chavas argue that the equivalence scales implicit in the official U.S. poverty line and in public welfare programs overcompensate parents for their children, with resulting negative distributional and incentive effects. We show that their analysis is based on a very particular, and ethically unappealing, assumption about the importance of children's well-being.     

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.     

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.     

APPRAISAL OF DIFFERENT METHODS OF ESTIMATING EQUIVALENCE SCALES AND THEIR RESULTS

This paper discusses the problems encountered in constructing equivalence scales of the relative incomes required to enable families of different sizes or in different circumstances to enjoy the same standard of living. Theoretical problems and limitations of various methods are discussed, and examples of empirical results are presented.     

A new approach to the construction of family equivalence scales

The question of the money compensation which should be given to families of different sizes in order that they enjoy equal welfare levels is considered. By comparison of individual welfare functions, estimated for 3,000 individuals in the Netherlands, family welfare equivalence scales are derived. The obtained equivalence scale depends on family size and the ages of the family members. There are considerable ‘economies of scale’. The method employed may be used to derive money compensations for other situational differences. Evidence was found that people adapt their needs to situational changes. That effect was quantitatively assessed. Results are obtained and compared for various social subgroups.     

A SPECIFICATION SEPARATING FAMILY SIZE AND INDIVIDUAL AGE EFFECTS ON SUBJECTIVE EQUIVALENCE SCALES: A NOTE

This paper analyses the Kapteyn and Van Praag method of estimating equivalence scales with respect to the way family size and age composition are incorporated into the scales according to rank and age of each family member. It becomes evident that the Kapteyn/Van Praag procedure fails to distinguish between household size and individual age effects with the result that personal weights can not be used for recomposition of household types other than wife and husband families, nor can they be interpreted as showing real age dependence of personal income equivalence. For these reasons another specification of the general approach, separating both effects, is outlined. This specification distinguishes between several consumption classes within each household. Within each class, economies of scale are attached to similar individuals while differences in individual need are obtained by comparing individuals with the same rank in the different classes.     

ARE EQUIVALENCE SCALES THE SAME FOR THE UNITED STATES AND CANADA?

This research uses microdata from the 1986 Statistics Canada Family Expenditure Survey and from the 1986–88 U.S. Consumer Expenditure Survey to estimate equivalence scales using a methodology which is very similar to that employed by Statistics Canada for the estimation of Low-Income Cutoffs. Employing identical sample selection criteria and identically specified models, we find that equivalence scales for the two countries are not, in general, statistically different when estimated in the same way. The larger issue is then whether the two countries should choose the same methodology for the estimation of equivalence scales.     

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.     

Revealed community equivalence scales

This paper estimates the equivalence scale revealed by discretionary community allocations of welfare benefits to poor households. I apply the proposed approach to a subsidized rice program in Indonesia in which villages designated program beneficiaries, and estimate the equivalence scale implicit in the beneficiaries they selected. I find that the “revealed community equivalence scale” for this program lies much closer to per capita expenditure than traditional demand-based equivalence scales, particularly in the poorest communities. This suggests that per capita expenditure may be closer to how poor communities actually compare households when allocating aid than previously thought.     

Engel Scales for Australia, the Philippines and Thailand: A Comparative Analysis

The purpose of this study is to explore the question of how similar or how different are equivalence scales of selected countries in the Asia-Pacific region. In particular, the article investigates whether equivalence scales for Australia, the Philippines and Thailand are comparable. That the Philippines and Thailand are two countries which are strikingly similar in their levels of socioeconomic development suggests the possibility that the relative income needs of households of different sizes in these countries are similar. In contrast, Australia is seen as an industrialised nation unlikely to have scales similar to the two other countries. The comparability problem is addressed via the widely used Engel estimation methodology applied to similarly selected samples and a common model specification. It is found that the level of agreement between the country-specific scales is highly dependent on what ‘basket of necessities’ is used as an indicator of welfare. An interesting outcome that may well be of useful empirical significance is that with necessities defined to include food, clothing, and housing (and possibly, medical care as well), the equivalence scales for the Philippines, Thailand and Australia are more or less invariant; no such regularity exists if the definition of necessities is confined to food alone.     

PRICES,INEQUALITY, AND POVERTY: METHODOLOGY AND INDIAN EVIDENCE

This paper uses a methodology for evaluating the distributional implications of price movement for inequality and poverty measurement. The methodology is based on a distinction between inequalities in nominal and real expenditure. The conversion of nominal to real expenditure takes into account the varying household preferences. The empirical application to the Indian budget datasets from NSS rounds 50, 55, and 61 shows the usefulness of the proposed procedures. The relative price changes in India have tended to be inequality and poverty reducing as confirmed by formal statistical tests. The result is robust to expenditure dependent equivalence scales. The progressivity of the relative price changes weakened in the second half of our time period as Fuel and Light overtook the composite group called “Miscellaneous” in recording the largest price increase. While the poverty rates registered a decline, which was marginal in the urban areas, there was a sharp increase in inequality.     

Generalised cost scaling: A new approach to demographic variables in demand analysis

A new approach to modelling equivalence scales and household demand systems is introduced and its usefulness empirically demonstrated. The empirical results suggest that price effects on the general equivalence scale are more important than utility effect.