Income-(in)dependent equivalence scales and inequality measurement

Abstract

Most equivalence scales that are applied in research on inequality do not depend on income, even though there is strong empirical evidence that equivalence scales are actually income-dependent. This paper explores the consistency of results derived from income-independent and income-dependent scales. We show that applying income-independent scales when income-dependent scales would be appropriate leads to violations of the transfer principle. Surprisingly, there are some exceptions, but these require unrealistic and strong assumptions. Thus, the use of income-dependent equivalence scales almost always leads to different assessments of inequality than the use of income-independent equivalence scales. Two examples illustrate our findings.

The impact of income definitions on mortality inequalities

“…Further, although the OECD-modified scale has been widely used by researchers and organizations to calculate household disposable income in mortality inequality research (e.g., Brønnum-Hansen, Östergren, et al, 2021 ; OECD, 2013 ; Tarkiainen et al, 2012 ), alternatives exist. Previous studies have suggested that equivalence scales have an impact on the level of income inequality itself, as well as on the association between income and mortality ( Dudel et al, 2021 ; Pascual et al, 2005 ). Additional analysis using the Oxford and square-root scales found largely the same temporal trends, although the magnitude of mortality inequalities varied substantially across the scales ( Fig.…”