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Equivalence scales reconsidered – an empirical investigation

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  • Timm Bönke

    (Freie Universität Berlin, Germany)

  • Carsten Schröder

    (University of Kiel, Germany)

Abstract

Households can differ in size and needs. A reliable assessment of inequality in living standards, therefore, necessitates the conversion of the original heterogeneous into an artificial quasi-homogeneous population. Ebert and Moyes (2003) and Shorrocks (2004) theoretically explore the properties of two conversion strategies, i.e., to calculate household equivalent incomes and then to weight household units by their size vs. their needs. We use data from the Luxembourg Income Study for examining the sensitivity of the Gini and the Theil index to the chosen conversion strategy, and explain our results by means of an inequality decomposition by household types. Country inequality rankings are sensitive to the conversion strategy applied. The decomposition analysis reveals the underlying mechanisms. We find inequality estimates typically to be lower in the size-weighted distribution compared to needs-weighting. This is driven by relatively higher weights of large household units in case of size weighting in combination with inequality being typically below average among households with children.

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Bibliographic Info

Paper provided by ECINEQ, Society for the Study of Economic Inequality in its series Working Papers with number 102.

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Length: 34 pages
Date of creation: 2008
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Handle: RePEc:inq:inqwps:ecineq2008-102

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Keywords: income distribution; inequality; inequality decomposition; equivalence scale.;

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  1. Buhmann, Brigitte, et al, 1988. "Equivalence Scales, Well-Being, Inequality, and Poverty: Sensitivity Estimates across Ten Countries Using the Luxembourg Income Study (LIS) Database," Review of Income and Wealth, International Association for Research in Income and Wealth, vol. 34(2), pages 115-42, June.
  2. Jean-Yves Duclos & Paul Makdissi, 2005. "Sequential Stochastic Dominance And The Robustness Of Poverty Orderings," Review of Income and Wealth, International Association for Research in Income and Wealth, vol. 51(1), pages 63-87, 03.
  3. Coulter, Fiona A E & Cowell, Frank A & Jenkins, Stephen P, 1992. "Equivalence Scale Relativities and the Extent of Inequality and Poverty," Economic Journal, Royal Economic Society, vol. 102(414), pages 1067-82, September.
  4. Burkhauser, Richard V & Smeeding, Timothy M & Merz, Joachim, 1996. "Relative Inequality and Poverty in Germany and the United States Using Alternative Equivalence Scales," Review of Income and Wealth, International Association for Research in Income and Wealth, vol. 42(4), pages 381-400, December.
  5. Peter J. Lambert & Andre Decoster, 2004. "The Gini Coefficient Reveals More," University of Oregon Economics Department Working Papers 2004-18, University of Oregon Economics Department, revised 05 Dec 2004.
  6. Udo Ebert & Patrick Moyes, 2003. "Equivalence Scales Reconsidered," Econometrica, Econometric Society, vol. 71(1), pages 319-343, January.
  7. Aaberge, Rolf & Melby, Ingrid, 1998. "The Sensitivity of Income Inequality to Choice of Equivalence Scales," Review of Income and Wealth, International Association for Research in Income and Wealth, vol. 44(4), pages 565-69, December.
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