EQUIVALENCE SCALES, WELL‐BEING, INEQUALITY, AND POVERTY: SENSITIVITY ESTIMATES ACROSS TEN COUNTRIES USING THE LUXEMBOURG INCOME STUDY (LIS) DATABASE

TLDR

The Luxembourg Income Study database provides detailed household income microdata enabling international comparisons, and the choice of family equivalence scale—used to adjust income for differences in need—varies widely across the ten LIS countries and beyond. The paper reviews available equivalence scales and tests how different scales affect income inequality and poverty measures using the LIS database. The authors analyze LIS data by applying multiple equivalence scales to compute income inequality and poverty metrics, then compare the resulting absolute and relative levels across scales. The analysis shows that the choice of equivalence scale can systematically alter absolute and relative poverty levels, inequality, and country or subgroup rankings, implying that cross‑national comparisons must be interpreted cautiously. The LIS microdata allows researchers to choose among options such as equivalence scale.

Abstract

The Luxembourg Income Study (LIS) database on which this article is based offers researchers exciting new possibilities for international comparisons based on household income microdata. Among the choices the LIS microdata allows a researcher, e.g. income definition, income accounting unit, etc., is the choice of family equivalence scale, a method for estimating economic well‐being by adjusting income for measurable differences in need. The range of potential equivalence scales that can and are being used in the ten LIS countries and elsewhere to adjust incomes for size and related differences in need span a wide spectrum. The purpose of this paper is to review the available equivalence scales and to test the sensitivity of various income inequality and poverty measures to choice of equivalence scale using the LIS database. The results of our analysis indicate that choice of equivalence scale can sometimes systematically affect absolute and relative levels of poverty; and inequality and therefore rankings of countries (or population subgroups within countries). Because of these sensitivities, one must carefully consider summary statements and policy implications derived from cross‐national comparisons of poverty and/or inequality.