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Are equivalence scales sufficient to compare wealth between different household compositions?

One can observe that being poor will be affected by how the family, or the household you are a part of, is composed. When discussing poverty in conjunction with family composition, many researchers have used equvialence scales. The eqvivalence scale have been provided to compare poverty across households of different compositions – to make them comparable. The eqivalence scale has been characterized as effective due to the little information needed, an also because it takes into account how the households that are compared are composed. If the latter were not taken into account, and one simply divided total household income by the number of participants in the household, there would be some biases in the analysis. Take for instance two families;

 

Family 1: Composed of 2 adults with total Income: 2x.

Family 2: Composed of 1 adult with total income: x.

 

By comparing per capita income, the two families are equally well off. However, in some ways one can say that the first family is better off in the sense that the members can share the “public goods of the household” (like Wi-Fi, washing machine, television etc.) There are different equivalence scales, however the key concept is that they compare how wealthy families are, when taking into account total income, number of family members and the age of the family members.

 

Using (for instance) the OECD equivalence scale, one simply divides the total income of the household by the scale attached to that certain household composition. This in turn implies that the higher the equivalence scale, the less wealthy are a family for a given income level.

Skjermbilde 2016-04-26 kl. 16.48.13

 

Using the “OECD-modified” scale as a reference, one observes that the scale is increasing, and thus the wealth of a family is decreasing, in number of household members. Another observation is that the scale is lower (relative to members) when the number of earners in the household (adults) is higher. This means that the scale takes into account the additional needs of bigger households, as well as the ability to better finance “public goods of the household” when there are more earners.

 

Can we say that this is a sufficient basis for comparison? Can we simply state “the more participants, and the less earners; the less wealthy is a household”? Due to the equivalence scales; yes. But it is likely that there are more factors affecting the level of wealth of a household. Let me take an example. Say that there are two different families, with the same number of earners, and same number of members.

 

Family X: 2 earners (adults) and 1 seriously ill child.

Family Y: 2 earners (adults) and 1 perfectly healthy child.

 

Let us assume that the family X and family Y have the same total income. The need of financial recourses to take care of a healthy child will be smaller compared to what is needed to take care of a child who is seriously ill. An ill individual will need recourses like medical care (and more emotional support and care), which can be very expensive. But the equivalence scale of the two families will nevertheless be identical. Does this mean that family X and family Y are equally well off?

 

So, does the equivalence scales only apply to standard families, and not those in which are different. Will it be sufficient to state the age of- and the number of participants of a household to conclude for whether they are poor or not? Shouldn´t we take into account other factors that might also influence the wealth of a household?

 

Student 2670

 

 

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Author: studentnovasbe

Master student in Nova Sbe

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