Equivalence scales reconsidered – an empirical investigation

Households can differ in size and needs. A reliable assessment of inequality in living standards, therefore, necessitates the conversion of the original heterogeneous into an artificial quasi-homogeneous population. Ebert and Moyes (2003) and Shorrocks (2004) theoretically explore the properties of two conversion strategies, i.e., to calculate household equivalent incomes and then to weight household units by their size vs. their needs. We use data from the Luxembourg Income Study for examining the sensitivity of the Gini and the Theil index to the chosen conversion strategy, and explain our results by means of an inequality decomposition by household types. Country inequality rankings are sensitive to the conversion strategy applied. The decomposition analysis reveals the underlying mechanisms. We find inequality estimates typically to be lower in the size-weighted distribution compared to needs-weighting. This is driven by relatively higher weights of large household units in case of size weighting in combination with inequality being typically below average among households with children.