Declining Equivalence Scales and Cost of Children: Evidence and Implications for Inequality Measurement

Abstract

This article estimates expenditure-dependent equivalence scales for Italian couples with and without children. Following Donaldson and Pendakur (2006), the generalised absolute equivalence-scale exactness (GAESE) restrictions are incorporated into a translated quadratic almost ideal demand system. We obtain declining-with-expenditure equivalence scales, a pattern that tends to strengthen when the number of children increases. Thus, scale economies in current consumption are lower for families with poor expenditure capacities. We also show that families living in the South bear a substantial additional cost to achieve the same well-being of those living in the North. Finally, we find that ignoring the declining with expenditure pattern may involve a relevant understatement of measured inequality

Income Dependent Equivalence Scales, Inequality, and Poverty

“…6 Aaberge and Melby (1998), Donaldson and Pendakur (2006), and Balli and Tiezzi (2013) compare results for the Gini coefficient using income independent and income dependent equivalence scales; Juhasz and Biewen (2014) compare results for the low-income proportion, the Gini coefficient, and the Theil index. While the results of Donaldson and Pendakur (2006) and Juhasz and Biewen (2014) indicate that inequality and poverty are lower in case of income dependent equivalence scales compared to base independent scales, results of Aaberge and Melby (1998) and Balli and Tiezzi (2013) show considerably higher inequality. Furthermore, Aaberge and Melby (1998) and Donaldson and Pendakur (2006) find time trends in inequality to be affected, while this is not the case for Balli and Tiezzi (2013).…”

“…While the results of Donaldson and Pendakur (2006) and Juhasz and Biewen (2014) indicate that inequality and poverty are lower in case of income dependent equivalence scales compared to base independent scales, results of Aaberge and Melby (1998) and Balli and Tiezzi (2013) show considerably higher inequality. Furthermore, Aaberge and Melby (1998) and Donaldson and Pendakur (2006) find time trends in inequality to be affected, while this is not the case for Balli and Tiezzi (2013).…”

“…In the first case, inequality measures like the Gini coefficient will always be lower for income independent scales, while the second case allows no such clear cut conclusions. This is illustrated by the results of Aaberge and Melby (1998), Donaldson and Pendakur (2006), Balli and Tiezzi (2013), or Juhasz and Biewen (2014) who arrive at different conclusions regarding the effect of base independent versus base dependent scales on the Gini coefficient.…”

The implications of income dependent equivalence scales for measuring poverty in Sri Lanka

“…However, several studies have found that equivalence scales, and thus consumption scale economies depend on the chosen base level of utility or income at which these scales are constructed. For example, Balli and Tiezzi (2013), Donaldson and Pendakur (2003) and Koulovatianosa et al (2005) show that consumption scale economies are increasing with income while other studies reveal that they are decreasing with income (Beatty, 2010; Burch and Matthews, 1987; Griffith et al , 2009; Leibtag and Kaufman, 2003; Logan, 2011). An important implication of income dependent economies of scale is that it implies that richer and poorer households incur different costs in maintaining larger families.…”

“…However, there is some controversy about whether equivalence scales increase or decrease with income. For example, Balli and Tiezzi (2013), Donaldson and Pendakur (2003), Koulovatianosa et al (2005) and Majumder and Chakrabarty (2008) show that equivalence scales decrease with income. Since equivalence scales measure the cost of an additional household member, taking the possibility to share goods within the household into consideration, higher equivalence scale values mean lower economies of scale in consumption.…”