A Cross‐country Study of Equivalence Scales and Expenditure Inequality on Unit Record Household Budget Data

Abstract

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.

Why Does the Engel Method Work? Food Demand, Economies of Size and Household Survey Methods

“…For the same reason, the poverty rates are calculated from all areas of Papua New Guinea rather than just from the capital city. 16 Other methods based on estimation of a system of demand equations (for example, see Lancaster et al, 1999) may be too involved for many applied economists who just want to estimate an equivalence scale as an input into some other modeling task. and recall methods were used to collect data on the expenditures of two random samples of households in the same location, the elasticity of per capita food expenditure with respect to household size, given per capita total expenditure, was estimated to be )0.18 when using data collected by recall, but just )0.07 when using data reported in diaries.…”

“…But despite their importance, there is no generally accepted method of measuring household size economies. The Engel method is popular because it is simple, using food budget shares to indicate the welfare of different sized households (Lancaster, Ray and Valuezuela, 1999). 1 But this method is silent on how larger households actually achieve economies and it also lacks theoretical justification.…”

Measurement Error in Recall Surveys and the Relationship between Household Size and Food Demand

“…8 The commodity-specific degree of economies of household scale is: 7 Despite the lack of theoretical support for this method, as first pointed out by Nicholson (1976) and repeated by Deaton (1997), a number of economists continue to use the Engel method in studies of scale economies and the adult-equivalence of children in developing countries. Examples include Lanjouw and Ravallion (1995), Lancaster, Ray, and Valenzuela (1999), and White and Masset (2002). 8 A referee has pointed out that the constraint in equation (1) should have i (n) rather than n. But both Deaton and Paxson (and Gan and Vernon 2003, in a comment on them) use n so we follow that presentation.…”

Measuring Child Poverty in South Africa: Sensitivity to the Choice of Equivalence Scale and an Updated Profile

“…Woolard (2002) finds quite small scale economies (estimate of b = 0.85). Lancaster et al (1997) estimate an AES using the 1993 Project for Statistics on Living Standards and Development (PSLSD) data. They use Engel's procedure as well as models based on the demographically extended rank two and rank three ''complete'' demand systems.…”