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Financial Stress Thresholds and Household Equivalence Scales

Listed author(s):
  • G. C. Lim

    ()

    (Melbourne Institute of Applied Economic and Social Research, The University of Melbourne)

  • Sarantis Tsiaplias

    ()

    (Melbourne Institute of Applied Economic and Social Research, The University of Melbourne)

This paper relates indicators of household financial stress to household income and expenditure with the objective of identifying household stress thresholds and comparable equivalence scales. A model is proposed whereby households try to absorb income shocks or shifts by shrinking consumption or engaging in consumption substitution, and is applied to data from the Household, Income and Labour Dynamics in Australia Survey. Households have different capacities to absorb a shock or shift, with those unable to absorb a shock or shift being financially stressed. The distribution of household financial stress thresholds is estimated, and is found to be dependent on heterogeneity in both welfare sensitivity and discretionary consumption stickiness. We also examine the equivalence scales implied by the model and derive the distortion associated with the assumption of homogeneity. We find that this assumption has a distortionary impact and results in significant over- or underestimation of equivalence scales depending on household type and size.

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File URL: http://melbourneinstitute.unimelb.edu.au/downloads/working_paper_series/wp2015n05.pdf
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Paper provided by Melbourne Institute of Applied Economic and Social Research, The University of Melbourne in its series Melbourne Institute Working Paper Series with number wp2015n05.

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Length: 29pp
Date of creation: Jan 2015
Handle: RePEc:iae:iaewps:wp2015n05
Contact details of provider: Postal:
Melbourne Institute of Applied Economic and Social Research, The University of Melbourne, Victoria 3010 Australia

Phone: +61 3 8344 2100
Fax: +61 3 8344 2111
Web page: http://melbourneinstitute.unimelb.edu.au/
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  11. van der Gaag, Jacques & Smolensky, Eugene, 1982. "True Household Equivalence Scales and Characteristics of the Poor in the United States," Review of Income and Wealth, International Association for Research in Income and Wealth, vol. 28(1), pages 17-28, March.
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  14. van Praag, Bernard M S & Spit, Jan S & van de Stadt, Huib, 1982. "A Comparison between the Food Ratio Poverty Line and the Leyden Poverty Line," The Review of Economics and Statistics, MIT Press, vol. 64(4), pages 691-694, November.
  15. Phipps, Shelley & Garner, Thesia I, 1994. "Are Equivalence Scales the Same for the United States and Canada?," Review of Income and Wealth, International Association for Research in Income and Wealth, vol. 40(1), pages 1-17, March.
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