Australian Estimates of Working's Model Under Additive Preferences: Revised Estimates of a Consumer Demand System for Use by CGE Modellers and Other Applied Economists

In 1943 Holbrook Working postulated a declining linear relationship between the share of food in a household's budget and the logarithm of its (real) income. In a monograph published in 1987, Theil and Clements show how Working's empirical generalization can be integrated into a complete system of demand equations suitable both for timeFseries and for cross-sectional work. Empirical evidence from both types of data lends overwhelming support to the relationship fitted by Working, with food's budget share consistently estimated to decline by 0.13 to 0.15 percentage points for each one per cent increase in real per capita income. Against this backdrop the current paper uses annual Australian time series data, 1953-54 through 1985-86, to fit Working's Model under additive preferences to a six commodity classification of consumption. Serious misspecification is evident in these estimates. It is found that treating the quantity of 'Rent' (i.e., the services of the housing stock, largely owner-occupied in Australia) exogenously, and the corresponding (shadow) price endogenously, mitigates the symptoms of the initial misspecification problem, and improves the interpretability of the estimates. The results for food are fully consistent with those found by Theil and co-workers.