Equivalence Scales Revisited: Evidence from Subjective Data

Equivalence scales (ES) are widely used to compare income levels across different households.Yet the commonly used OECD and square-root scales rely on assumptions about household economies of scale that lack robust empirical support. Using responses to the Minimum Income Question (MIQ) from the European Union Statistics on Income and Living Conditions (EU-SILC) survey, we construct subjective ES based on panel data, rather than relying on pooled OLS as in most previous studies, allowing us to track how income needs evolve within households over time instead of comparing different households. The economies of scale in this subjective scale are notably different from those in traditional ES, and these differences have a substantial effect on the levels and distribution of equivalised income. Based on our empirical findings, we propose a simple alternative to conventional ES and illustrate its implications for poverty and inequality, both within and across countries. Our results show that the choice of equivalence scale significantly influences not only the estimated levels of these variables but also country rankings in comparative analyses.