NAME OF THE VARIABLE
5. The name of the variable is 'Equivalised household income'.
6. This variable has been developed to enable comparison of the relative incomes of households of different sizes and composition. When household income is adjusted according to an equivalence scale, the equivalised income can be viewed as an indicator of the income available to a standardised household or as an indicator of the resources available to each individual in a household.
DEFINITION OF THE VARIABLE
7. The standard nominal and operational definition of 'Equivalised household income' is:
household income adjusted using an equivalence scale to enable analysis of the relative incomes of households of different size and composition.
8. 'Equivalised household income' is derived by adjusting 'Total income 'using an equivalence scale. Note, equivalisation can be applied to any aggregate household income measure.
DISCUSSION OF CONCEPTUAL ISSUES
9. Equivalence scales have been devised to make adjustments to the actual incomes of households in a way that enables analysis of the relative wellbeing of households of different sizes and composition. For example, it would be expected that a household comprising two people would normally need more income than a lone person household if the two households are to enjoy the same standard of living.
10. One way of adjusting for this difference in household size might be simply to divide the income of the household by the number of people within the household so that all income is presented on a per capita basis. However, such a simple adjustment assumes that all individuals have the same resource needs if they are to enjoy the same standard of living and that there are no economies of scale derived from living together.
11. Various calibrations, or scales, have been devised to make adjustments to the actual incomes of households in a way that recognises differences in the needs of individuals within those households and the economies that flow from sharing resources. The scales differ in their detail and complexity but commonly recognise that the extra level of resources required by larger groups of people living together is not directly proportional to the number of people in the group. They also typically recognise that children have fewer needs than adults.
12. When household income is adjusted according to an equivalence scale, the equivalised income can be viewed as an indicator of the economic resources available to a standardised household. For a lone person household it is equal to household income. For a household comprising more than one person, it is an indicator of the household income that would need to be received by a lone person household to enjoy the same level of economic wellbeing as the household in question.
13. Alternatively, equivalised household income can be viewed as an indicator of the economic resources available to each individual in a household.
Choice of scale
14. While there has been considerable research to identify appropriate values for equivalence scales, no single standard has emerged. In theory, there are many factors which might be taken into account when devising equivalence scales, such as recognising that people in the labour force are likely to face transport and other costs that can affect their standard of living. It might also be desirable to reflect the different needs of children at different ages, and the different cost levels faced by people living in different geographic areas.
15. On the other hand, the tastes and preferences of people vary widely, resulting in markedly different expenditure patterns between households with similar income levels and similar composition. Furthermore, it is likely that equivalence scales that appropriately adjust incomes of low income households are not as appropriate for higher income households, and vice versa. This is because the proportion of total income spent on housing tends to fall as incomes rise, and cheaper per capita housing is a major source of economies of scale that flow from people living together.
16. It is therefore difficult to define, estimate and use equivalence scales which take all relevant factors into account. As a result, analysts tend to use simple equivalence scales which are chosen subjectively but are nevertheless consistent with the quantitative research that has been undertaken. A major advantage of simpler scales is that they are more transparent to the user, that is, it is easier to evaluate the assumptions being made in the equivalising process.
17. The ABS uses the 'modified OECD' equivalence scale. The 'modified OECD' equivalence scale has wide acceptance among Australian analysts of income distribution. More information is provided in 'Collection methods'.