APPENDIX 2 EQUIVALISED GROSS HOUSEHOLD INCOME QUINTILES
INTRODUCTION
1 The economic wellbeing of individuals is largely determined by their command over economic resources. People's income and reserves of wealth provide access to many of the goods and services consumed in daily life. The amount of income to which they have access is an important component of these resources. And while income is usually received by individuals, it is normally shared between partners in a couple relationship and with any dependent children. To a lesser degree, there may be sharing with other members of the household. Even when there is no transfer of income between members of a household, nor provision of free or cheap accommodation, members are still likely to benefit from the economies of scale that arise from the sharing of dwellings. Therefore the income measures shown in this publication relate to household income.
2 Gross household income can be used as an indicator of whether a person has a relatively high or low level of economic wellbeing. However, larger households normally require a greater level of income to maintain the same standard of living as smaller households, and the needs of adults are normally greater than the needs of children. Equivalised income estimates are estimates which have been adjusted by equivalence factors which standardise the income estimates with respect to household size and composition. Therefore estimates of equivalised gross household income are used in this publication as a more relevant indicator of relative economic wellbeing than non-equivalised income. Equivalised income is described in more detail in the next section of this Appendix.
3 In order to enable the comparison of groups of the population classified by their relative level of income, each household in the survey is allocated to an income quintile. More detail is provided in the last section of this note.
EQUIVALISED INCOME
EQUIVALENCE SCALES
4 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 size 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.
5 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 an 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 derived from living together.
6 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.
7 When household income is adjusted according to an equivalence scale, the equivalised income can be viewed as an indicator of 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.
8 Alternatively, equivalised household income can be viewed as an indicator of economic resources available to each individual in a household. The latter view underpins the calculation of income distribution measures based on numbers of people, rather than numbers of households.
CHOICE OF SCALE
9 While there has been considerable research by statistical and other agencies trying to estimate 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 do not contribute to 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. 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.
10 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.
11 In this publication, the 'modified OECD' equivalence scale is used. It has been used in more recent research work undertaken for the OECD and has wide acceptance among Australian analysts of income distribution.
DERIVATION OF EQUIVALISED INCOME
12 Equivalised income is derived by calculating an equivalence factor according to the chosen equivalence scale, and then dividing income by the factor.
13 The equivalence factor derived using the 'modified OECD' equivalence scale is built up by allocating points to each person in a household. Taking the first adult in the household as having a weight of 1 point, each additional person who is 15 years or older is allocated 0.5 points, and each child under the age of 15 years is allocated 0.3 points. Equivalised household income is derived by dividing total household income by a factor equal to the sum of the equivalence points allocated to the household members. The equivalised income of a lone person household is the same as its unequivalised income. The equivalised income of a household comprising more than one person lies between the total value and the per capita value of its unequivalised income.
14 When unequivalised income is negative, such as when losses incurred in a household's unincorporated business or other investments are greater than any positive income from any other sources, equivalised income has been set to zero.
15 The following table shows the relationship between gross household income and equivalised gross household income for various household compositions shown elsewhere in this publication.
A2.1 IMPACT OF EQUIVALISING GROSS HOUSEHOLD INCOME |
|
 | | Mean gross household | Mean equivalised gross household income per week | Aged 0 to 14 years | Aged 15 years or over | Total |
| | $ | $ | no. | no. | no. |
|
| Couple only, one family households | 1 573 | 1 044 | - | 2.0 | 2.0 |
| One family households with dependent children | | | | | |
| Couple family | 2 296 | 1 052 | 1.5 | 2.5 | 4.0 |
| One parent family | 1 018 | 629 | 1.2 | 1.6 | 2.9 |
| Lone person households | 809 | 807 | - | 1.0 | 1.0 |
| Other households | 1 949 | 967 | 0.2 | 3.0 | 3.2 |
| All households | 1 585 | 949 | 0.5 | 2.0 | 2.5 |
|
| - nil or rounded to zero (including null cells) |
INCOME QUINTILES
16 When persons (or any other units) are ranked from the lowest to the highest on the basis of some characteristic such as their household income, they can then be divided into equal sized groups. When the population is divided into five equally sized groups, the groups are called quintiles. The quintiles can be described in terms of the highest level of the characteristic that falls within each of the first four quintiles, that is, their upper boundaries.
17 Equivalised gross household income quintiles are used in this publication to compare groups of the population according to their relative income levels. The population used for this purpose includes all people living in private dwellings, including children and other persons under the age of 18 years. The upper boundaries set for each quintile for this population are shown in the table below. However, as the scope of this publication is restricted to only those persons 18 years of age and over living in private dwellings, the distribution of this smaller population across the quintiles is not necessarily the same as it is for all people living in private dwellings. The differences in these distributions are illustrated in the table below.
18 It should also be noted that household income is not known for about 18% of persons in the survey. These persons and their households are excluded from the calculation of equivalised gross household income and from the analysis of the population by income quintile. See the Data Interpretation section in the Explanatory Notes for more detail.
A2.2 Distribution of population across equivalised gross household income quintiles |
|
| | Quintile |
| | Lowest quintile | Second quintile | Third quintile | Fourth quintile | Highest quintile | Total(a) |
|
| Equivalised gross household weekly income per week at upper boundary of quintiles (($)) | 403 | 639 | 931 | 1 356 | - | - |
| Persons from 0 years of age | | | | | | |
| Number ('000) | 3 346 | 3 486 | 3 486 | 3 638 | 3 509 | 17 466 |
| Proportion (%) | 19.2 | 20.0 | 20.0 | 20.8 | 20.1 | 100.0 |
| Persons 18 years and over | | | | | | |
| Number ('000) | 2 673 | 2 605 | 2 633 | 2 831 | 2 956 | 13 697 |
| Proportion (%) | 19.5 | 19.0 | 19.2 | 20.7 | 21.6 | 100.0 |
| Households | | | | | | |
| Number ('000) | 1 599 | 1 364 | 1 271 | 1 369 | 1 441 | 7 044 |
| Proportion (%) | 22.7 | 19.4 | 18.0 | 19.4 | 20.5 | 100.0 |
|
| - nil or rounded to zero (including null cells) |
| (a) Total for whom household income is known. |
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