Equivalisation (once again)
Abstract
Income inequality and poverty statistics are often adjusted for differences in the size and composition of households, with common practice being to use a set of “equivalence scales”: a function of the number of adults and children in the household. However, different – largely ad-hoc – scales have been adopted by international organisations and national statistical organisations with little explicit justification. We derive equivalence scales from the expenditure patterns of households using data from the 1987-2015 Irish Household Budget Survey. We find that the Engel, Rothbarth and demand system approaches all yield scales for children that are substantially smaller than those used by ad-hoc official scales, with estimates from AIDS and QUAIDS demand systems appearing to decline over time. Such a decline is particularly noticeable when a 3SLS estimator is used to correct for the potential endogeneity of total expenditure, which also leads to substantially smaller estimated scales for both adults and children. This suggests an increase in economies of scale over the period we examine, with important implications for the measurement of poverty and inequality.