Alternative Approaches to the Estimation of Household Equivalence Scales: An Australian Application

Abstract

The equivalence scale is a concept with considerable policy significance. As an instrument for comparing welfare levels of households differing in size and composition, it seeks to answer such questions as, "How much income does a household with two adults and one child need to enjoy the same level of welfare?". Such comparisons are inevitable in major policy exercises such as the measurement of inequality and poverty, studying the effects of a set of tax changes on welfare levels of different households and calculating the compensation that a household with a child requires for the additional cost of that child. This research develops new methods for estimating equivalence scales from budget data.