The three fundamental features of any empirical study of inequality and poverty relate to the income concept, the income unit and the time period of analysis. This paper is concerned with the first two features and examines the sensitivity of several inequality and poverty measures to the choices of the adult equivalence scale, used to adjust total household income, and the unit of analysis. Standard measures of inequality and poverty were designed for homogenous populations. Achieving the required homogeneity involves creating, as Ebert (1997, p.235) aptly put it, ‘an (artificial) income distribution for a fictitious population’. In creating an income distribution, household income is adjusted using an adult equivalence scale so as to provide a more accurate reflection of ‘living standard’. A unit of analysis or income recipient is then defined to form the fictitious population.
Section 2 considers the alternative concepts and measures used. It introduces the two-parameter functional form of the adult equivalence scale which is used in the empirical analyses, and discusses the use of three units of analysis (or weights attached to households in computing inequality measures), namely the household, the equivalent adult and the individual. The corresponding inequality and poverty measures are also briefly described. Section 3 presents the main empirical comparisons for New Zealand. These demonstrate the sensitivity of New Zealand’s inequality and poverty measures to the parameters of the equivalence scales, and in addition to the chosen unit of analysis. This section also considers the effects on inequality of varying the inequality aversion coefficient, along with the effects on poverty measures of varying the poverty line. Section 4 identifies the roles of both the equivalence scale and unit of analysis in the context of the redistributive effect of direct taxation. Emphasis is placed on the degree of reranking involved when using alternative scales. Section 5 examines a range of equivalence scales designed for New Zealand, the United Kingdom, Australia and the OECD. To provide comparable estimates of parameters, the two-parameter equivalence scale function is fitted to the various scales used. The resulting scales are applied to the New Zealand data and the resulting inequality and poverty measures are contrasted. Brief conclusions are provided in section 6.
- Cowell (1984) discussed nine alternatives, arising from a distinction between three types of income recipient and three income measures.