Differences across countries and time in household expenditure patterns: implications for the estimation of equivalence scales

ABSTRACT

When comparing economic well-being using income or expenditures, an equivalence scale is often used to adjust for differences in characteristics that affect needs. For example, a family of two is assumed to need more income than a single person, but not twice as much due to the economies of scale in consumption. In this study, we ask whether it is appropriate to use a common equivalence scale when comparing economic well-being across countries and/or time if consumption expenditure patterns differ? Based on an Engel methodology, we estimate equivalence scales for a diverse set of countries (Canada, France, Israel, Poland, South Africa, Switzerland, Taiwan, United States) in different time periods (1999–2012). We find considerable differences in economies of scale across countries, as well as increases over time. Notably, we find that economies of scale are larger than those implied by the widely accepted ‘square root of household size’ equivalence scale. Our results indicate that using a common equivalence scale to compare economic well-being across countries and/or time is misleading. Specifically, if economies of scale are understated (as is the case when using the ‘square root of household size’), the relative poverty experienced by larger versus smaller families is being overstated.

KEYWORDS:

• Economic well-being
• Engel
• necessities
• equivalence scale
• economies of scale
• poverty

JEL CLASSIFICATION:

• I3
• D1

Acknowledgements

Thanks to Marisa Gudrais in the Division of Price and Index Number Research at the Bureau of Labor Statistics for assistance with coding, and to staff in the Consumer Expenditure Survey Division for help with the data. We are also grateful to Peter Burton and Patricia Ruggles for their helpful suggestions. Angela Daley recognizes support from the USDA National Institute of Food and Agriculture, Hatch project 1016011.

Disclosure statement

No potential conflict of interest was reported by the authors.

Data availability

This study is based on public-use files of the Survey of Household Spending (available from Statistics Canada), the Consumer Expenditure Survey (available from the Bureau of Labor Statistics) and data from the Luxembourg Income Study Data Center (http://www.lisdatacenter.org).

Notes

1. Equivalence scales are not the only approach that can be used. Refer to Decancq, Fleurbaey, and Schokkaert (2015) for a discussion of the alternatives.

2. We assume that individuals who live in the same household have the same standard of living, but we acknowledge this is not always the case (Burton, Phipps, and Woolley 2007).

3. Prior to 2015, the Bureau of Labor Statistics collected expenditure data over five consecutive quarters, with data from the first interview being used for bounding but not estimation. Beginning in 2015, only four quarters of data are collected with no bounding.

4. See Coulter, Cowell, and Jenkins (1992), Jenkins and Cowell (1994) for a discussion of parameterized equivalence scales.

Additional information

Funding

Angela Daley recognizes support from the USDA National Institute of Food and Agriculture, Hatch project 1016011.