Policy Research Paper No 27

A family's needs:
Equivalence scales, poverty

and social security
Research Paper No. 27

Development Division
Department of Social Security
April 1985
A FAMILY'S NEEDS :
EQUIVALENCE SCALES, POVERTY AND SOCIAL SECURITY
The author of this paper is

Peter Whiteford of the
Development Division,
Department of Social Security.
Earlier versions of the paper

were presented at the 53rd
ANZ AAS Congress in Perth in
May 1983 and at the Social
Welfare Research Centre in
September 1983.
ISBN 0 642 51588 3 C. J. THOMPSON, Commonwealth Government Printer
(i)
Acknowledgements
The issue of equivalence scales has been a concern of the

Department of Social Security for some time. This paper builds
on previous work by past and present members of the Development
Division, particularly David Ingles, David Stanton and Cheryl
Hammond. Research assistance was provided by Andrew Stuart. I
have particularly benefited from comments provided by Andrew
Burbidge, Bettina Cass, Jim Cox, Mary Anne Cumming, Meredith
Edwards, Alan Jordan, Ian Manning, Colin McAlister, Ian McRae,
Vic Rogers and David Stanton. I am also grateful for comments
received from other officers of the Development Division.
However, I alone am responsible for any errors. The views
expressed are my own.
(ii)
TABLE OF CONTENTS
PAGE
Acknowledgements (i)
Table of Contents (ii)
List of Tables (iv)
1. INTRODUCTION
1.1 The concept of equivalent standards of living 1

1.2 The uses of equivalence scales 4
1.3 Outline of the paper 5
2. EQUIVALENCE SCALES AND POVERTY RESEARCH
2.1 Rowntree and the budgetary approach 7

2.2. The Henderson relativities 9
2.3 The cost of a child - a modern minimum 12
2.4 Appraisal of the budgetary approach 16
2.5 Relative measures of poverty and relative
family needs 20
2.6 Townsend and relative deprivation 26
2.7 Conclusion - poverty measurement and equivalence 38
3. THEORIES OF CONSUMER BEHAVIOUR IN ECONOMICS
3.1 Data sources 40

3.2 Engel's law and the proportional approach 44
3.3 The Engel model 53
3.4 The Prais-Houthakker method 54
3.5 Identification and other mathematical problems 55
3.6 Utility theory 64
3.7 The Barten method 69
3.8 The extended linear expenditure system (ELES) 72
3.9 Appraisal of the Barten and ELES models 74
4. THE ATTITUDINAL APPROACH
4.1 The individual welfare function of income 81

4.2 Appraisal of the attitudinal approach 85
5. CONCLUSION
5.1 Some complications 89

The different approaches and the role
of value judgements 89
Private choice and public support 91
Gross and net costs 93
Economies of scale 94
The new theory of consumer behaviour 94
Money and other resources 97
The unit of analysis 99
The time period 100
(iii)
TABLE OF CONTENTS (contd)
PAGE
5.2 Comparing equivalence scales 102

General results 102
The costs of children 110
The costs of working 110
One-earner and two-earner families 113
5.3 Equivalence scales and poverty measurement 114
5.4 Objectivity, values and needs 119
5.5 An equivalence scale for Australia? 128
APPENDIX - Additional Tables 133
BIBLIOGRAPHY 139
(iv)
LIST OF TABLES
No. Title Page

2.1 Rowntree's equivalence scales
- York, 1936 8
2.2 Henderson standard costs 11
2.3 Henderson relativities for selected
family compositions - New York, 1954 13
2.4 Comparison of relativities implicit
in Supplementary Benefit scale rates
and Piachaud's estimates of the cost
of children - United Kingdom, 1979-80 15
2.5 Comparison of relativities implicit
in pension rates and Lovering 's
estimates of the cost of children -
Australia, May 1983 16
2.6 Equivalence scales implicit in net
incomes of different types of income
units by principal source of income
- Australia, 1978-79 23
2.7 Equivalence scales implicit in the
distribution of average household
expenditures by household composition
and household income - Australia,
1974-75 25
2.8 Components of the Townsend deprivation

index 30
2.9 Townsend equivalence scales for

selected household types - United
Kingdom, 1968-69 32
3.1 Equivalence scales for Canada using
the proportional approach - 1959-
1969 46
3.2 Equivalence scales using the "Canadian"

approach - Australia, 1974-75 47
3.3 Detailed equivalence scales using

the "Canadian" approach - Australia,
1974-75 48
3.4 Equivalence scales from the "Canadian"

approach for two adult households
where the head works and the spouse
does not - Australia, 1974-75 48
(v)
No. Title Page
3.5 Equivalence scales using the

proportional approach - United States,
1960 49
3.6 Further various examples of

equivalence scales using the
proportional approach 50
3.7 Equivalence scales using the

proportional approach - Israel,
1968-69 51
3.8 'Prais-Houthakker equivalence scales'

- Britain, 1937-39 57
3.9 'Prais-Houthakker equivalence scales'

as estimated by Podder - Australia,
1966-68 58
3.10 McClements equivalence scales -

United Kingdom, 1971-72 59
3.11 Provisional equivalence scales

derived from the Jensen equivalence
formula 60
3.12 Various equivalence scales adapted

from Prais-Houthakker model 63
3.13 General equivalence scales using

the Barten model - United Kingdom,
1975 71
3.14 Equivalence scales with age

differences using the Barten model -
United Kingdom, 1975 71
3.15 Pre-committed expenditures ($p.w.)

for selected groups - Australia,
1975-76 73
3.16 Pre-committed expenditures ($p.a.)
- Australia, 1967 74
3.17 Equivalence scales using the ELES

method - Australia, 1967 75
3.18 Basic equivalence scales using the

ELES method - Australia, 1974-75 76

the ELES method - Australia, 1974-75 77
(vi)
No. Title Page
3.20 Lazear - Michael equivalence scales

- United States, 1960-61 77

the ELES method - United States,
1960-61 78
4.1 Estimated equivalence scales from

the attitudinal approach -
Netherlands, 1975 83
4.2 Detailed equivalence scales from

the attitudinal approach -
Netherlands, 1971 84
5.1 Comparison between various

equivalence scales 106-107
5.2 Geometric means derived from

equivalence scale research 109
5.3 O.E.C.D. equivalence scales 109
5.4 Detailed equivalence scale estimates

of the costs of children by age 111
5.5 The costs of working - estimates of

the percentage increase in income
required to maintain equivalent
standard of living when household
head works 112
5.6 Working and dependent spouses -

percentage increase in income
required to maintain equivalent
standard of living when spouse works 114
5.1 Estimates of trends in poverty in
Australia by equivalence scales used 116
A.I Equivalences implicit in the

Australian social security system:
Comparison of selected years
1964/65 to 1983/84 and November
1984 134-135
A. 2 Equivalences implicit in the Australian

income taxation system - 1976-77 and
1983-84 136
A. 3 Equivalences implicit in international

family allowance programs - 1981 137
A. 4 Age loadings in international family

allowance programs - 1981 138
1. INTRODUCTION
1.1 The concept of equivalent standards of living
A number of problems in social policy require a method for

comparing the standards of living of different family or
household types.(1) In attempting to measure the extent of
poverty and inequality, in judging the appropriateness of the
structure of pensions and benefits, in considering the levels of
taxation allowances, maintenance payments, housing commission
rents or child care fees, and in deciding on priorities for
additional assistance in all these areas, it is necessary to take
into account the differing needs of families due to their
differing size and composition and members' characteristics.
Equivalence scales (or ratios) attempt to take account of these

factors - they are measures of the relative incomes needed by
different types of families to attain a similar standard of
living. Equivalence scales are usually expressed as a set of
numbers; some arbitrarily chosen family or household type is
taken as the base and its value is set equal to 1.0. Other
family types are then expressed as proportions of this base. For
example, if the benchmark is taken to be a married couple without
children (2), then to determine that the figure for a single
individual is 0.60 implies that a single individual needs only 60
per cent of the income of a married couple to be as well off as
they are. Similarly, if the figure for a couple with two
dependent children is 1.24, then they need 124 per cent of the
income of a couple without children to attain the same level of
well-being. This also implies that married couples with no
children and incomes of, say, $10,000, married couples with two
children and incomes of $12,400, and individuals with incomes of
$6,000 should, on average, be able to attain a similar standard
of living. Thus, on this measure, while a couple with two
children and an income of $12,000 per year, say, would have a
money income twice that of a single person with $6,000 per year,
their effective income (relative to their needs) would actually
be less than that of such an individual. That is, such a family
could actually be poorer than an individual with less than half
their money income.
(1) The terms "family" and "household" are used loosely. The
unit of concern is generally the income unit for social
security purposes.
(2) The choice of the benchmark family can have an important

effect on some of the practical applications of equivalence
scales. The couple without children is chosen in this paper
because it allows the effects of adding children to be
easily seen. The wider implications of choosing a couple as
the benchmark are discussed in Section 5.1.
Different aspects of families' circumstances are relevant to
differing areas of policy concern. For example, in analysing
social security and welfare policies, a family's "needs" are
relevant; in the taxation field "capacity to pay" is of interest;
in analysing income distribution statistics the extent of
"poverty" is a major concern. Poverty, capacity to pay and need
are closely related, but not identical. The concept that is most
comprehensive and has the widest application is that of "standard
of living".
What is meant by a family's standard of living, and what is
understood when standards of living are compared? It is possible
to say what standard of living does not mean. The concept of
standard of living can be distinguished from other related ideas
such as quality of life, happiness, utility or personal
satisfaction. For example, individuals such as alcoholics may be
described as maximising utility at considerable cost to their
standard of living. Similarly a person may change jobs to
increase his or her quality of life, and at the same time be only
able to achieve a lower standard of living. Children may be a
source of happiness to families, but they can cause a lowered
standard of living.
More positively, according to McClements, "living standards
describe the material well-being of the household or family unit
as perceived by it and society as a whole rather than personal
happiness per se " (1978, p.36). Jensen's definition is similar -
he concludes that it is apparent that the "standard of living of
a household is not an objectively defined function of its level
of consumption, rather (it) is specified by the general consensus
amongst members of the society about what the household1s pattern
of consumption is judged to represent in terms of material well-
being" (1978, p. 5).
While there is a fair degree of agreement on broad definitions
such as those of McClements and Jensen, there has been
inconsistency in the way such definitions have been used in
practice. For example, while the definitions cited above (and
many others) point out that two important, formal elements in a
family's standard of living are its own subjective judgement
about its situation and the way or ways in which the general
community ranks standards of living, in practice a family's
standard of living is usually treated as being determined by the
types and quantities of goods and services it consumes.
The fundamental problem, however, is that a person's standard of
living is itself a concept and, like other concepts such as need
or poverty, utility or welfare, it is an abstraction that cannot
be directly observed. Yet many people commonly make judgements
about their own or others' standards of living and in making
those judgements refer to social conditions and personal
situations that are real and observable. Living standards should
be measurable, at least in terms of some indirect indicators.
Equivalence scales (and poverty lines) attempt to provide such
indicators. The derivation of these indicators, however,
involves a number of complex issues. For example, the simplest
way of comparing different families is on the basis of family
size, i.e. assume that a family of four requires four times the
income of a single person to achieve the same living standard.
This per capita approach is intuitively appealing, but there are
obvious problems - a young child does not need the same amount of
food as an adult, the clothing or transport costs of individuals
may differ if they are working or retired. The per capita
approach also does not take account of economies of scale with
increasing family size - two adults may spend twice as much on
food or clothing as one, but the cost of housing usually does not
double for two. The needs of families may also differ with the
age of adults, their position in the family life cycle or their
asset holdings - for example, a retired couple who own their own
home may have a very different living standard from a young
couple, with the same money income, who are buying a home.
Equivalence scales therefore should take account of all these
factors - family size, age of children, age of adults, asset
holdings, economies of scale - and also any other factors that
determine families' patterns of consumption of goods and services
as a pre-requisite to comparing the standards of living of
different family units. Determining the right way of balancing
these factors is not an easy task. The problem is precisely
comparable to that involved in the development of an index of the
cost of living. It is not an exaggeration to say that
equivalence scales can have as much practical importance as does
the Consumer Price Index (CPI).(3)
(3) For a discussion of the CPI, see Australian Bureau of

Statistics, A Guide to the Consumer Price Index, (Cat No
6440.0). Deaton and Muellbauer (1980, pp. 169-190) discuss
true indexes of the cost of living.
1.2 The uses of equivalence scales
This discussion points to a number of important uses for
equivalence scales. As Cox (1982, p.22) notes:
Related to the concept of an equivalence scale is that of an
equivalent income distribution which is calculated by
dividing families' or households' incomes by the relevant
equivalence scale value. By considering incomes in relation
to needs this procedure ranks them on a single scale. To
the extent that income is an accurate measure of financial
resources it seems reasonable to suggest that those with low
equivalent incomes are likely to have the greatest
difficulty in making ends meet (and therefore may be most in
need of extra government assistance); those with greater
equivalent incomes are likely to have fewer difficulties.
In fact, any analysis of statistics on the distribution of income
must either explicitly or implicitly involve the use of
equivalence scales. If equivalence scales are not explicitly
used, then effectively the analysis simply assumes that all
families at a certain income level achieve the same standard of
living, irrespective of the size or characteristics of the
family. Thus, in poverty research, it is not possible to avoid
making judgements about the relative needs of families.
Equivalence scales are also implicit in the structures of the
social security and personal income taxation systems. In
evaluating these systems or proposals to change them, judgements
about needs or ability to pay must be made. Equivalence scales
can also be used in answering more specific policy questions, for
example:
What benefit should be paid for a child relative to
that for an adult?
How much should a single person receive relative to a
married couple?
Should a person living alone receive the same benefit
as a person sharing accommodation with others?
What are the additional costs associated with
disability or with looking for work?
How do the housing costs of renters differ from those
of persons who own or are buying their homes?
How do costs vary with the age of children or with the
location of the family?
1. 3 Outline of the Paper
This paper is not intended to answer all these substantive
questions. Rather it provides an overview of the major issues
and problems involved in research into the derivation of
equivalence scales, with particular emphasis on their application
in the area of income security research and policy.
There have recently been some notable Australian contributions to
the literature on equivalence scales. These have been the Social
Welfare Policy Secretariat's (SWPS) Report on Poverty
Measurement (1981), the accompanying paper prepared by the
Australian Bureau of Statistics (ABS) on the estimation of
equivalence scales for Australia from Household Expenditure
Survey (HES ) data, and a subsequent paper by Jim Cox, presented
at the Social Policy Conference in Canberra in May 1982, and
published as "Equivalent Income Distributions" in the Social
Security Journal (December 1982). This paper goes over some of
the same ground, and attempts to put these recent works in the
broader perspective of the tradition of writings on equivalence
scales. The present paper surveys the field in some depth, but
because it is intended to be of use to interested non-experts, it
does not deal in a mathematically rigorous way with many of the
issues raised, except to the extent that some of the issues
cannot be fully appreciated without some technical background
detail.
The paper commences with a discussion of some of the ways in
which various researchers have dealt with the definition and
measurement of a family's standard of living. There are a number
of alternatives. One approach is to define a 'basket of goods'
or a budget which will allow different families to achieve a
specified standard of living (for example, a poverty standard or
a "modest but adequate" standard of living). The costs of these
budgets for different types of families provide the scale of
equivalence. This method has often been used in poverty
research, for example, by Rowntree (1901, 1942). The scales
developed by Beveridge (1942) and the poverty lines used
officially in the United States (Orshansky, 1965, 1969, 1975) are
further examples of this approach. The scales used by the
Commission of Inquiry into Poverty in Australia (Henderson, 1975)
are also of this type. This method is essentially normative -
the scales are developed from a series of judgements about what a
family should consume or how it should behave. The paper
provides an extensive discussion of the poverty literature, as it
is in this context that much of the interest in equivalence
scales has arisen.
The contrasting approach is to estimate scales from surveys of
the actual expenditure behaviour of households. The paper
discusses the assumptions and methodology of a number of examples
of this approach; specifically, the 'Canadian' method and the
application of that method by the ABS and SWPS (Love and Oja,
1977; SWPS,1981; ABS,1981); the Prais-Houthakker method, with an
estimation procedure by McClements (Prais and Houthakker, 1955;
McClements, 1975, 1977, 1978); the Barten method, with an
estimation procedure by Muellbauer (Barten,1964; Muellbauer,
1980); and the Extended Linear Expenditure System (ELES) as
applied by Kakwani and ABS/SWPS (Kakwani, 1977; ABS, 1981; SWPS,
1981). While these studies have important features in common,
the specific assumptions and techniques involved vary widely. As
with the literature derived from poverty research, the economic
studies can be described as constituting a tradition, where
successive research has attempted to resolve or to by-pass the
conceptual, technical or measurement problems of previous
research.
There are further methods of determining equivalence scales that

do not directly belong to either of these major traditions. The
paper discusses two approaches that have recently been prominent
- the equivalence scales developed by Peter Townsend in his study
of Poverty in the United Kingdom (1979), and the "attitudinal
scales", derived by directly questioning people about the income
required to keep them out of poverty or to give them a reasonable
standard of living. However, while Townsend's scales are not
derived from the "basket of goods" or budget approach, his survey
does belong to the tradition of poverty research, and is
therefore discussed in that section.
The paper then discusses the results of all these estimation

procedures and compares them with the relativities implicit in
the Australian social security system and those in a number of
other countries. The paper concludes with a discussion of the
usefulness of various scales, the practical importance of
determining that a particular scale is appropriate for
application, and the conflicting factors that need to be taken
into account in policy considerations.
2. EQUIVALENCE SCALES AND POVERTY RESEARCH (4)
2.1 Rowntree and the budgetary approach

Rowntree's survey of York in 1899, published in 1901 as
Poverty; A Study of Town Life, is one of the first major works
on the determination of the relative needs of low income
families. Rowntree essentially tried to find the minimum cost of
maintaining a family at a subsistence standard of living. He
established his poverty line by drawing up a list of necessities
under the headings of food, clothing, fuel and household
sundries, and then estimated how much it would cost to buy them.
In Rowntree's original study, the food allowance was based on the
cost of standard diets required by low income families as
specified by nutritional experts. The estimates for clothing,
fuel and rent were based on actual working-class expenditure in
York.
Rowntree's second study of York in 1935-36 proceeded along
similar lines to those used in the 1899 survey. Rowntree
estimated that an urban family of man, wife and three dependent
children required an income of 53 shillings per week "to secure
the necessaries of a healthy life" (1942, p. 28). It appears
that this figure happened to be the same as the minimum wage
customarily paid to an adult male in York's main industry, the
manufacture of cocoa, chocolate and general confectionery (p.
9). After excluding rent (9 shillings 6 pence), the remainder
was allocated as follows: food, 47 per cent; clothing, 18 per
cent; fuel and light, 10 per cent; household sundries, 4 per
cent; and personal sundries (unemployment and health insurance,
trade union and sick club subscriptions, travel costs, beer,
tobacco, holidays, etc), 21 per cent. The money amount of each
of these categories was calculated separately. For example, the
sum allowed for food was based on the report of a committee
appointed in 1933 by the British Medical Association "to
determine the minimum weekly expenditure on food stuffs which
must be incurred by families of varying size if health and
working capacity are to be maintained" (1942, p. 29). The
amounts Rowntree allowed for other categories of expenditure were
based either on his own and others' opinions or, as in the case
of clothing, on the actual expenditure of those among a small
group of families who spent the least.
In order to determine the amounts required for different types of
families, and thus the equivalence scales, Rowntree undertook
what he termed "a careful examination of the families' real
needs" (p. 31). For example, the costs of an unemployed man were
determined by subtracting health and unemployment insurance
contributions, trade union subscriptions and the costs of
travelling from the budget for an employed man. The results of
these calculations are shown in Table 2.1.
(4) For a review of approaches to the definition and

measurement of poverty, see Stanton (1973). SWPS (1981,
pp. 18-61) also discusses various concepts of poverty.
8
Table 2.1 : R o w n t r e e ' s equivalence scales - York, 1936
Employed Unemployed Age Pensioner
Single man 0.81 (0.93) 0.71 (0.82) 0.48 ( 0 . 5 5 )

Single woman 0.67 (0.77) 0.55 (0.63) 0.39 ( 0 . 4 5 )
Couple 1.00 (1.15) 0.87 (1.00) 0.70 (0.81)
Couple and one child 1.20 (1.38) 1.10 (1.27) -
Couple and two children 1.30 (1.49) 1.22 (1.40) —
Couple and three children 1.37 (1.57) 1.27 (1.46)
—
For each additional child, add 0.17 (0.19)
For each additional adult male dependant, add 0.36 (0.41)
For each additional adult female dependant, add 0.24 (0.28)
Note: The figures in brackets are the relativities derived if a
couple with an unemployed head is taken as the base.
SOURCE: Rowntree, 1942, p. 30.
Notable features of these scales include the significant

differences between the costs of males and females, and the large
differences between the allowance for age pensioners and those
for younger families, given that housing costs are not included
for any unit. The results also show striking economies of scale
- for a couple with an employed head, the first child adds 20 per
cent, the second 10 per cent and the third 7 per cent. This is
surprising given the importance of food in the basic budget.
Another interesting feature of these scales is the greater
relative cost of children in families with an unemployed head
compared to the relative costs of children in families with an
employed head. For example, one child adds 20 per cent to the
expenditures of an employed family and 27 per cent to the costs
of an unemployed family. But unemployed families show even
greater economies of scale in moving to higher numbers of
children than do employed families. This somewhat contradictory
result probably reflects the essentially ad hoc way in which
Rowntree adjusted his scales to exclude the costs of working.
The severity of the scale derived in this way is illustrated by

Rowntree's original description of the standard of living of
those living on the poverty line in 1899:
A family living upon the scale allowed for in this estimate
must never spend a penny on railway fare or omnibus. They
must never go into the country unless they walk. They must
never purchase a halfpenny newspaper or spend a penny to buy
a ticket for a popular concert. They must write no letters
to absent children, for they cannot afford to pay the
postage. They must never contribute anything to their
church or chapel, or give any help to a neighbour which
costs them money. They cannot save, nor can they join sick
club or trade union, because they cannot pay the necessary
subscriptions. The children must have no pocket-money for
dolls, marbles, or sweets. The father must smoke no tobacco
nor drink beer. The mother must never buy any pretty
clothes for herself or for her children, the character of
the family wardrobe, as for the family diet, being governed
by the regulation: 'Nothing must be bought but that which is
absolutely necessary for the maintenance of physical health,
and what is bought must be of the plainest and most
economical description'. Should a child fall ill, it must
be attended by the parish doctor; should it die, it must
be buried by the parish. Finally the wage-earner must never
be absent from his work for one day. (1901, pp. 133-134)
This quotation also amply illustrates the many small factors that
are involved in judgements about the adequacy of a family's
standard of living, and by implication the many areas of
judgement that could be involved in deriving equivalence scales
from budget studies. At the same time this quotation expresses
the realities of poverty, real not simply because it is a severe
or austere standard with which no one can argue, but real because
it expresses the details of life of the poor and provides
information from which more informed judgements about their
standard of living can be made.
2.2 The Henderson relativities
The first detailed survey of poverty in Australia was undertaken
by the Institute of Applied Economic and Social Research at the
University of Melbourne in 1966, and the results were first
published in The Economic Record (Harper, 1967) and later in more
detail in People in Poverty, A Melbourne Survey (Henderson,
Harcourt and Harper, 1970).The poverty line used was
essentially arbitrary -it was simply assumed that if the standard
family of a man in work, wife at home and two children had in
1966 an income that was below the basic wage plus child
endowment, they would be likely to be in poverty. Thus, the
rounded poverty line of $33 per week for such a family was
derived without any study of the actual needs and costs of
Australian families. (5)
Henderson, Harcourt and Harper then used the 1954 "Family Budget
Standard", prepared by the Budget Standard Service of the
Community Council of Greater New York to adjust their poverty
line for differing family structures. The Family Budget Standard
attempted to reflect for New York a "modest but adequate" level
of living based partly on expenditure studies, and partly on what
were judged to be scientific requirements for good nutrition and
health. These were used to formulate a regimen appropriate to
families in low to moderate income groups. Because of the
complexity of the 1954 data (it not only allowed for the number
of adults and children in the family unit, but also for age, sex,
and workforce status of family members, and whether the head
lived alone or with other people), Professor Henderson used a
simplified version of these relativities in the Interim and First
(5) For detailed criticisms of the Henderson poverty line, see

Stanton (1980) and P. Saunders (1980). Manning (1982)
provides a defence of the use of the Henderson line.
10
Main Reports of the Commission of Inquiry into Poverty. The more

complex standard cost assumptions were used to compute the
numbers and percentages below the poverty line. The only change
was that for costs varying with household size (housing, fuel,
power costs, etc), the series was smoothed to eliminate
irregularities and anomalies (for example, rental costs in the
1954 data were less for two persons than for one).
In deriving his simplified system of relativities, Henderson

aggregated the 1954 New York standard costs into five classes of
individuals: working head; non-working head; working wife;
non-working wife; and dependent children. He did this by
calculating simple averages for all classes except dependent
children. For these he calculated a weighted average to avoid
the upward bias which the significantly higher standard costs for
the 15 and over age groups would give to a simple average.
Table 2.2 illustrates the standard costs used in the adjustment
of income.
The standard costs in Table 2.2 are made up of two parts. First,
there are the specific costs for each person, covering items such
as food, clothing, education, recreation and transport, that vary
according to the characteristics of the individual. Second,
there are the housing and other costs like power, light and
furniture that depend on the total size of the household. In
order to calculate the costs of different types of income units,
the appropriate costs for individuals (head, wife and any
children) are taken from Part A and added to the appropriate
housing and other costs from Part B. In the case of income units
sharing a household with others, the housing and other costs are
taken as a fraction of the costs of the appropriate total
household size, the fraction being the ratio of the number of
persons in the income unit to the total number of persons in the
household.
The standard costs assumptions shown in Table 2.2 have many
interesting features. It can be seen from Part A that the costs
for each person are generally higher for males than for females,
higher for those working than those at home, and higher for those
living alone than for those sharing accommodation with others.
Costs also vary with age, rising significantly for older children
and declining somewhat for older adults. The housing costs in
Part B show quite marked economies of scale, e.g. housing for a
twelve-person household costs only twice as much as housing for a
one-person household. This table shows a number of apparent
anomalies - for example, a working female single parent has
slightly lower food and clothing costs than a working wife if
they are both under 40 years of age, but higher costs if they are
over 40 years of age; a 65 year old working male who lives alone
has higher food and clothing costs than a similar female, but if
such persons share accommodation with others, then the female has
higher costs than the male. The housing costs in Part B vary
only with household size, not by type of individual or income
unit. This implies that the housing costs of a mother with an
infant are the same as those of two unrelated adults or that five
adults have the same housing costs as a couple with three
children. These unexplained patterns perhaps reflect a danger of
this very detailed approach to the determination of equivalence
11
Table 2.2: Henderson Standard Costs
Part A:Food,clothing and other costs that vary with family status,
age, sex and work status of individuals.
I STANDARD COST OF INCOME UNIT HEADS
(i) Where income unit head lives alone
Age Under 40 40-65 65 and over
Employment
status Works At home Works At home Works At home
Males 20. 80 14.80 20. 30 14. 30 20.00 12. 95

Females 20.40 12.75 20.15 12.50 19.85 10.85
(ii) Where income unit head lives with other people
Age Under<der 40 40--65 65 an<3 over

Employment
Males 19.70 13.70 19.20 13.20 18. 90 11.85
Females 20.40 12.75 20.15 12.50 19.85 10.85
II STANDARD COST OF WIVES
Employment
Wife 20.70 10.00 17.45 9.75 17.15 8.10
III STANDARD COST OF CHILDREN
Males 5..08 £5.48 ]L 3 . 0 0

Females 5..08 E5 . 2 3 ]LI. 05
(B) Costs varying with household size (poi.nts)

Household size Housing costs Fuel/power etc. costs Total
1 12.1 4. 9 17.0
2 13.1 6.7 20.0
3 14.5 8.0 22.5
4 15.7 9.3 25.0
5 16. 9 10.6 27.5
6 18.2 11.8 30.0
7 19.4 12.6 32.0
8 20.0 14.0 34.0
9 21.2 14.8 36.0
10 21.8 16.2 38.0
11 22.4 17.6 40.0
12 + 24.2 19.8 44.0
SOURCE: Henderson, 1975 , p. 354.

12
scales -can costs be specified so precisely or does this show no

more than a spurious accuracy? These sorts of questions should
be the subject of further inquiry. However, the Melbourne survey
of 1966, while it did collect information on the food, housing
and health expenditures of the sample, did not attempt
systematically to verify the accuracy of these standard cost
assumptions. The 1973 survey for the Poverty Inquiry collected
information on housing expenditures but not on other spending and
could therefore not be used to assess these assumptions.
The Henderson equivalence scales are calculated from these
standard costs by determining the standard family (say a couple
with working head, non-working wife (both under 40) and no
dependent children), then determining the appropriate costs from
Part A of Table 2.2 and adding to them the costs from Part B, and
then replicating this procedure for any other families of
interest and expressing the result as a percentage of the costs
for a standard family. For example:
(i) Standard costs or )

points for standard family ) 19.70 + 10.00 + 20.00
of working head, non-working ) = 49.70 points
wife (both under 40) and no )
dependent children )
(ii) Standard costs for single )

male age pensioner living ) 12.95 + 17.00 = 29.95
alone ) points
(iii) Equivalence scale ) 29.95 = 0.60

value ) 49.70
The relativities derived in this way are shown in Table 2.3.

Overall, as could be expected, these equivalence scales reflect
the patterns found in Table 2.2, showing the standard costs.
2.3 The cost of a child - a modern minimum
The budgetary approach continues to be used in a number of

contexts. Two notable recent examples of this method are
provided by Piachaud (1979) in the United Kingdom and Lovering
(1983) in Australia. Piachaud, in The Cost of a Child; A Modern
Minimum, attempted to assess the adequacy and appropriateness of
the Supplementary Benefit Scale rates for dependent children.(6)
His standards were intended to reflect prevailing social
attitudes, and not only requirements necessary to maintain life.
He developed estimates of the money costs of providing for
children aged two, five, eight or eleven years. The requirements
for food were based on the quantities contained in a low-cost
diet in a 1970 American study of nutrition. These food items
(6) Supplementary benefit (SB) is a means-tested payment

available to low income people in the UK not in full-time
work, including persons receiving National Insurance
benefits.
13
Table 2.3: Henderson Relativities for Selected Family Compositions - New York, 1954
Family Composition Head Working Head not Working
male female male female
Single, under 40 years .76 .75 .64 (0.73) .60 (0.68)

40-65 years .75 .75 .63 (0.72) .59 (0.67)
65 and over .74 .74 .60 (0.68) .56 (0.64)
Single, under 40 years, with:

one child under 6 .92 .91 .80 (0.91) .76 (0.86)
two children, m 6-15, f 0-6 1.14 1.14 1.02 (1.16) .98 (1.11)
three children, m 15+, f 6-15, m 0-6 1.45 1.44 1.33 (1.51) 1.28 (1.45)
wife wife at wife wife at

works home works home
Couple, under 40 years 1.21 1.00 1.09 (1.24) .88 (1.00)

40-65 years 1.14 .98 1.02 (1.16) .86 (0.98)
65 and over 1.12 .94 .98 (1.11) .80 (0.91)
Couple, under 40 years, with:
one child under 6 1.36 1.15 1.24 (1.41) 1.03 (1.17)
two children, m 6-15, f 0-6 1.59 1.37 1.46 (1.66) 1.25 (1.42)
three children, 15+, f 6-15, m 0-6 1.89 1.68 1.77 (2.01) 1. 55 (1.76)
four children, m 15+, f 6-15, m 0-6, f 0-6 2.04 1.83 1.92 (2.18) 1.71 (1.94)
five children, m 15+, f 6-15, m 6-15, f 0-6, m 0-6 2.26 2.04 2.14 (2.43) 1. 92 (2.18)
six children, m 15+, f 15+, m 6=15, f 6=15, mO-6, fO-6 2.52 2. 30 2.40 (2.73) 2.18 (2.48)
Note: The figures in brackets are the relativities derived if a couple with a head not working
is taken as the base. m = male, f = female.
SOURCE: Henderson, 1975, pp. 354-355.
14
were then costed at a London Safeway supermarket. Estimates of

clothing and footwear requirements were derived by talking to a
group of mothers, somewhat reducing their estimates, determining
the average durability of each item, and then costing them at a
Marks and Spencers department store. Requirements for household
provisions such as linen, laundry, soap and toothpaste were
determined in a similar way and costed at Woolworths and other
supermarkets. Costs for heating and lighting were simply assumed
additional costs per child e.g. that a child required at least
two hot baths a week. It was assumed that the costs of schooling
were restricted to those associated with school outings.
Finally, Piachaud included in his estimates the cost of a week's
holiday per year, four inexpensive outings per year, a small
weekly amount of pocket money, and allowance for two small
presents per year.
The results of these calculations were presented as minimum money
amounts per child per week, and then compared with the
Supplementary Benefit rates. The SB rates for children
projected to May 1980 ranged from around 60 per cent of the
estimated costs of an 8 year old to 70 per cent of the costs of a
5 year old.
Piachaud's results do not directly provide estimates of
equivalence scales. It is possible, however, to derive
equivalences by assuming that the standard rate of Supplementary
Benefit was unchanged and that Piachaud only wished to change the
relative allowances for children. This may be a dubious
assumption, but is useful for illustrative purposes. The
resulting relativities are shown in Table 2.4.
Lovering's study of the Cost of Children in Australia was carried
out in response to a request from the Family Law Council, and is
intended as a guide for use by Family Law Courts in the
determination of maintenance payments. While Lovering explicitly
states that the study was not aimed at setting poverty lines, the
results are compared with social security payments in order to
assess their adequacy. The paper is essentially an attempt to
replicate Piachaud's study and briefly reviews Piachaud plus a
wide range of overseas and Australian evidence on the cost of
children. Most attention is paid to the estimation of food costs
of children of different ages. Piachaud's figures are compared
with various estimates prepared by the United States Department
of Agriculture, the West Australian Institute of Technology, the
Family Substitute Care Section of the Victorian Department of
Community Welfare Services, the Australian Council of Social
Service, the New South Wales (NSW) Health Commission and
Department of Youth and Community Services and the Home Economics
Department of Victoria College, among others. Most of these are
budget studies, involving the specification of minimum
requirements. The quality of the data used appears to vary
widely. For example, the estimates of costs of household
provisions for medium income families was derived from a single
case study of a family with three teenagers.
All findings were reported as dollar amounts required for
necessities for children of different ages. Estimates were
15
Table 2.4: Comparison of relativities implicit in Supplementary

Benefit scale rates and Piachaud's estimates of the
cost of children - United Kingdom 1979-1980
Supplementary Piachaud
Benefit relativities *
relativities
Single person 0.62 0.62

Sole parent,
one child (2 years) 0.79 0.84
Sole parent,
two children
(2 and 5 years) 1.00 1.11
Sole parent,
three children
(2, 5 and 8 years) 1.21 1.44
Sole parent,
four children
(2, 5, 8 and 11 years) 1.47 1.79
Couple, no children 1.00 1.00

Couple, one child
(2 years) 1.18 1.23
Couple, two children -
(2 and 5 years) 1.39 1.50
Couple, three children
(2, 5 and 8 years) 1.60 1.82
Couple, four children
(2,5, 8 and 11 years) 1.86 2.17
* Based on costs of children adjusted for free school meals and
milk, and inflation at May 1980
SOURCE: Piachaud, 1979, p. 17 and Social Work Today Vol.11, No.
31, 15-4-80, pp. 4-5.
provided for the costs of food, clothing and footwear, household

provisions, heat and electricity, toys and presents, pocket
money, some schooling expenses and entertainments. Costs not
estimated include housing, transport, school fees and uniforms,
child care, holidays and medical and dental expenses. Costs were
determined for low income and medium income groups; costs for low
income families varied between about $16.50 a week in May 1983
for a child of two years to $27.90 a week for a child of 11
years.
16
Again, while Lovering did not use these estimates to determine

equivalence scales, it is possible to calculate such relativities
if it is assumed that the low income level costs of children can
be simply added on to the level of pension for those without
children. The results are shown in Table 2.5.
Table 2.5 : Comparison of relativities implicit in pension

rates and Lovering's estimates of the cost of
children - Australia May 1983 *
Pension Levering
Relativities Relativities
Single person 0.60 0.60
Sole parent,
Sole parent,
two children (2 and 5 years) 0.90 0. 93
Sole parent,
three children (2,5 and 8 years) 1.03 1.12
Sole parent,
four children (2,5,8 and 11 years) 1.17 1.33
Couple, one child (2 years) 1.11 1.12
Couple, two children (2 and 5 years) 1.24 1.28
(2,5 and 8 years) 1. 38 1.47
(2, 5, 8 and 11 years) 1.52 1.67
* The "pension relativities" include family allowances; they
would have increased slightly because of actions taken in the
1983-84 and 1984-85 Budgets. "Lovering relativities" for sole
parents take as the base payment the standard rate of pension
plus mother's/guardian's allowance.
SOURCE: Lovering, 1983, p.62 and author's own calculations.
2.4 Appraisal of the budgetary approach
As can be seen from these examples, the essential feature of this

approach to determining equivalence scales is that minimum
standards of adequacy are specified a priori. Where
investigation of actual budgets does take place, it is usually
assumed that a family's minimum needs can be judged from the
expenditures of an arbitrarily selected group on low incomes.
17
Since the time of Rowntree's studies, the budgetary approach has

proved very influential in poverty research, and it has often
been considered an appropriate way of determining an "objective"
poverty line. The approach has also often been criticised for
two related reasons; that it has confused stringency with the
idea of objective, "absolute" poverty, and that indeed it is
essentially a subjective approach to poverty measurement and the
derivation of equivalence scales.
The claim that the budgetary approach is objective arose
initially from the belief that it is possible to specify
"scientifically" what are the necessities of life in terms of
biological and physiological requirements. In order to reduce
the area of disagreement, these necessities have usually been
specified in a narrow or severe way. But it is now generally
considered that it is not possible to specify scientifically even
a food budget that will satisfy nutritional needs, and take
account of no other factors. As Townsend notes, "estimates of
nutritional needs in fact include a larger element for activities
which are socially and occupationally determined than for
activities which are biologically and physiologically
determined." (1979, p. 36) This approach also implicitly assumes
that families are actually able to live as budgetary experts
think they should. Usually no allowance is made for
inefficiencies in buying or preparing food, or for the customs,
habits and tastes that inevitably structure everyday behaviour.
For example, the "official" United States' poverty lines are
partly based on an "economy food plan" budget designed to satisfy
nutritional needs. Yet in 1969 it was estimated that only 10 per
cent of families spending up to the level of the plan were
actually able to get a nutritionally adequate diet. (Orshansky,
1969, p. 38)
The charge of arbitrariness is repeated in the SWPS Report on
Poverty Measurement (1981, p.36), which criticises the budgetary
approach by arguing that budgets can be constructed to show
almost anything - either that there is no poverty in Australia,
or that it is rampant. SWPS also conclude from their discussions
with welfare agencies who had particular interest or expertise in
compiling budgets, that there was no general agreement on what
would constitute a reasonable minimum standard of living for
Australians. Moreover, some agencies which compile budgets for
practical use by low income families thought it was inappropriate
to use these budgets in the measurement of poverty. From a
number of perspectives, therefore, the budgetary approach seems
particularly subject to political manipulation under the guise
of technical analysis.
The claim of subjectivity is also implicit in many economists'
criticisms of the budget studies approach to deriving equivalence
scales. For example, Fodder (1971, p. 176) points out that
calculating budget costs of families of differing composition on
the basis of nutritional requirements implies making normative
statements. This may be true, but its significance is debatable,
as it depends upon acceptance of the view that normative
judgements are necessarily arbitrary, or inferior in some other
way.
18
Major problems do arise when budgetary standards are to be

updated. Rowntree's description of poverty, quoted earlier,
clearly relates to factors that went to make up a family's
standard of living in York more than 80 years ago. Even if the
severity of the standard were considered appropriate, how have
the components changed and what effect have these changes had on
the overall weights to be given to different types of families?
For example, it is likely that expenses associated with children
have changed significantly over the past generation, and much
more so since 1899. The raising of the minimum school leaving
age, changing patterns of recreation, and the combination of
general improvements in living standards with higher expectations
of material comfort will all have put pressures on parents in the
ways that they provide for their children. The changed labour
force participation of teenagers may well have altered some of
the costs of this group. However these factors balance out
overall, it cannot simply be assumed that the relative costs of
children have remained the same over the past 80 years. The same
points could be made about the costs of working or the costs of
housing.
If this is so for York, what about New York? According to
Henderson et. al., the use of the Family Budget Standard "assumes
that the relationship between the costs of living of, say, a pre-
school child and a working adult male is similar in New York in
1954 and in Melbourne in 1966 ... if one has to settle on a
standard pattern, the New York data do present a set of cost
relationships that appear quite plausible for Melbourne" (1970,
p. 27). Stanton describes this assumption as "heroic" when it
was first made in 1966, and as "astonishing" when it was made for
the Poverty Inquiry in 1973 (1980, p. 19). An example of major
differences between the Henderson relativities and actual
Australian practice is the cost of car ownership, which was not
included in the 1954 scale because in New York public
transportation was almost universally accepted as the cheapest
and most convenient form of transport. But SWPS show that
transport costs were about 4 per cent of total expenditure of the
standard family in New York in 1954, but about 15 per cent of the
costs of a low income family in Australia in 1974-75 (1981, pp.
133-134). Presumably, further changes have occurred between 1975
and 1984.
Moreover, a number of New York studies have been compiled since
1954. Two of these - in 1962 and in 1969 - have involved a major
reconstitution of the basic regimen to reflect changing values as
to what constitutes a "modest but adequate" standard of living.
Each of these major studies has been updated annually using the
Community Council's Annual Price Survey. These updatings have
the effect of changing the relative costs of various families to
a small degree, due to differential rates of increases in the
prices of various goods and services. These changes also
illustrate the extent to which the budgetary approach can involve
judgements, judgements which may or may not be open to argument.
19
For example, the cost of television and automobile ownership was

included in the 1969 standard but not in 1954; the amount of
movie-going was assumed to be less in 1969 than in 1954; working
family heads were allowed one suit a year in 1954, but in 1969
one suit was expected to last three years. The same sorts of
judgements were made in Rowntree's study in 1935-36 - the wife of
an employed man was allowed one shilling more for clothing
expenses than was normally spent by wives in this situation, but
the wife of an unemployed man was not allowed this extra
shilling. (1942, p. 29)
These types of judgements are not necessarily arbitrary, although
these particular examples do appear to be so because of their
lack of consistency. In any case, it is clear that equivalence
scales developed twenty or more years ago in other societies
should be used with caution as a guide to the costs of Australian
families in the 1980s. It can also be expected that the
budgetary approach will generally provide estimates of
equivalence scales that are biased upwards, unless specific
allowance is made for economies of scale.
Yet, despite these problems the budgetary approach does have

intuitive appeal. The sorts of judgements to be made are
commonsense rather than technical, and the impact of differing
judgements about family circumstances can be more directly
appreciated by non-experts. This approach may be a useful way of
validating, or at least invalidating, equivalence scales and
poverty lines. Once poverty line incomes are determined, by
whatever method, for each family type, budgets may show what such
incomes can actually buy and what such incomes require different
families to go without. More informed judgements about the
adequacy or inadequacy of different income levels are therefore
possible. Moreover, the need to update budget studies regularly,
while a practical problem, is not necessarily a disadvantage, as
it means that continuing inquiry into the components of families'
standards of living is required.
For example, the quotation from Rowntree on page 26 captures the
details of the reality of poverty in 1899. While many of these
specific details may no longer be relevant in 1985, they do have
modern correlatives. The inability to "spend a penny to buy a
ticket for a popular concert" may now be an inability to buy a
ticket to the movies or the inability to buy a television set.
The reality of what was once an inability to "spend a penny on
railway fare or omnibus" may now be represented by those persons
who have never been able to fly by aeroplane when they take their
holidays because of the expense. Those who could not "join sick
club" may now be those working families who cannot afford visits
to the dentist or cannot afford to purchase pharmaceuticals.
The realities for children may still be the same - no pocket
money for dolls or marbles, and where they have sweets it may be
no more than a convenience, a filling alternative to a proper
diet.
20
The budgetary approach potentially allows the re-analysis of the

real details and meaning of poverty in a modern context. While
Henderson, Harcourt and Harper (1970) do provide case studies and
other information of a detailed qualitative nature, the major
weakness of subsequent analysis using the Henderson poverty line
is that it does not deal at all with the details of poverty.
For the purpose of deriving equivalence scales, however, the"

greatest weakness of this approach is that it is simply assumed
that a specific poverty line standard of living can be defined;
the equivalence scales are the ratios of the resultant poverty
lines for different family sizes. There is no formal attempt to
define what is meant by a family's standard of living. Other
budgetary studies have attempted to define other than subsistence
standards of living e.g. a "modest but adequate" standard of
living (see, SWPS, 1981, pp. 29-30), but the relationship between
different standards has not been systematically explored.
2.5 Relative measures of poverty and relative family needs
These sorts of problems are well recognised in the literature on

poverty research and, consequently, the budgetary approach
generally has been rejected in favour of "relative" methods of
determining a poverty line. The impetus for this development has
come from the recognition of the fact that the budgetary approach
is not in some sense inherently scientific, and that subsistence
expenditures are no more amenable to objective determination
than any other expenditures. It has also been felt that bare
subsistence has little relevance to modern societies and that
this approach therefore provides measures of low income that are
static or out of date, and consequently leads to underestimates
of the extent of poverty.
The alternative, the relative approach, derives from the view

that "people are poverty-stricken when their income, even if
adequate for survival, falls markedly behind that of the
community". (Galbraith, quoted in Stanton, 1973, p. 26). In
this sense poverty is a standard of living "markedly below the
average" (Howard, 1982, pp. 5-6), and is a result of inequality
in the distribution of incomes. Poverty can then be simply
measured; for example, a poor family may be judged to be one
whose income is less than some fraction, say half, of the median
or mean family income. Fuchs claims that this approach ".
makes no pretense of being objective and therefore is not subject
to political manipulation under the guise of 'technical budget
studies'. The selection of the fraction, be it one-half, two-
fifths, three-fifths or some other, would be recognised as a
national value judgement and would be arrived at openly through
the political process" (quoted in Stanton, 1973, pp.26-27). As a
further alternative, poverty may be measured in an even narrower
relative sense; for example, the poor may be considered to be the
bottom 20 or 25 per cent of the income distribution no matter
what their absolute level of income.
21
In addition to its comparative advantages, given the weaknesses

of the budgetary approach, the relative method is convenient to
use and update and simple to understand. Perhaps its greatest
perceived advantage is that poverty and inequality are explicitly
linked. If poverty is seen as a consequence of inequality, then
poverty is a feature of society's structure and functioning and
not a result of personal accident or weakness, with the attendant
notions of the "deserving" and "undeserving" poor. This is
significant because the view of poverty that is adopted has
major implications for the anti-poverty policies favoured - the
relative approach is consonant with social policies that seek to
affect the distribution of resources within society as a whole,
while the subsistence approach is generally regarded as being
linked to residual policies directed at low income groups only,
usually modest in scale and sometimes improving in tone, e.g.
nutritional and budgeting education programs.
The relative approach, however, does have many problems.

Essentially, it is simply a convenient way of determining a
poverty line, and the measure thus determined has no inherent
credibility. For example, in the sense that Fuchs discusses,
there is no difference between a poverty line that is set at 45
per cent of median family incomes and one that is set at 50 per
cent. The choice of either proportion would be no more than "a
national value judgement". But on what basis can these value
judgements be made? It is likely that estimates of the extent of
poverty, in Australia at least, would vary significantly
depending upon the proportion adopted. Because the Australian
social security system provides flat-rate, income-tested
payments, and because most pensioners and beneficiaries have very
little income apart from their pension, there is a high degree of
clustering in the income distribution e.g. in 1973-74, the single
rate of age pension was around $1,200 and more than 300,000
single aged persons (53 per cent of aged one-person income units)
had incomes between $1,200 and $1,400. Thus if the poverty line
adopted varied by as little as $5 per week, much less than by 5
per cent of median family incomes, the entire 300,000 income
units could be "moved" into or out of "relative poverty". The
meaning fulness of such a measure must be regarded as
questionable.
What this example shows is that this particular measure of
relative poverty is abstract and information-poor.(7)
Moreover, perhaps as a consequence of this abstractness, the
relative approach is silent on the derivation of equivalence
scales.
There are a number of alternative solutions to this problem. One

is that adopted by the Commission of Inquiry into Poverty.
Despite its origins, the Henderson poverty line for a
standard family, being 56.5 per cent of average weekly earnings
(AWE) when it was developed and being subsequently updated (until
recently) by movements in AWE, must now be considered a relative
(7) An attempt to develop a more detailed, informative measure

of relative poverty is provided by Howard (1982).
22
measure of poverty of the type proposed by Fuchs. The

equivalence scales used by Henderson have no conceptual link to
the standard poverty line. On the basis of this example one
could simply link a relative poverty line to a set of equivalence
scales derived from some unrelated method. This too is a
convenient approach to the problem.
A way of determining equivalence scales that would appear to be
conceptually consistent with the relative income approach would
be to derive relativities from the distribution of income itself.
The results of such a procedure are summarised in Table 2.6,
which shows the equivalence scales implicit in the median and
mean net incomes of different types of income units in Australia
in 1978-79. This table also illustrates the problem with this
approach - basically the incomes that families are able to
achieve bear no relation to common-sense ideas of their relative
needs. On the one hand, for example, the median net incomes of
all married couple income units with children whose principal
source of income was wages or salary were less than the median
net incomes of similar couples without children. This simply
reflects the fact that for married couples with children there is
more likelihood that only one spouse is working than for couples
without children. Again, the median (and mean) net incomes of
one person income units in 1978-79 whose principal source of
income was wages or salary were less than half those of the
standard married couple without children. But as the table
suggests this result is no indicator of the relative needs of
these types of income units - rather the result substantially
reflects the fact that these single person units are on average
young, and for that reason are likely as a group to have lower
wages than older workers. On the other hand, the implicit
equivalences for persons whose principal source of income was
government social security benefits do appear to conform more to
reasonable ideas of relative needs. But this reflects the fact
that social security payments, in contrast with wages and
salaries, are structured according to ideas of relative family
needs and also that social security recipients conform to that
structure because they are not particularly likely to have other
significant sources of income.
Overall, therefore, this particular method of determining
equivalence scales, while consistent with the relative approach
to poverty measurement, does not provide satisfactory measures of
relative family needs. In summary this is so because:
(i) the wage and salary system has no explicit link to
family needs;
(ii) the social security system does structure family
incomes, but cannot be regarded as an independent
measure of family needs; and
(iii) both family incomes and needs are related to factors
such as work force participation and age of family
head, which in turn are related to the presence of
children, but in such a way that income may not be
congruent with needs.
23
Table 2.6: Net Incomes of different types of
Income units by principal source of Income and
implicit equivalence scales - Austral la, 1978-79
PRINCIPAL SOURCE OF INCOME
TYPE OF Wages or Gc>vernment Social

INCOME IN IT Salary (A) S«security Benefits (A) Total* (A)
Married couples Number 825,300 384, TOO 1,479,900

with no Median Age
dependent of Head 48.2yrs 69.4yrs 57.1yrs
children Median Net
Income $ 13,380 (1.00) $ 5,050 (1.00) $ 10,450 (1.00)
Mean Net
Income $ 13,740 (1.00) $ 5,380 (1.00) $ 11,620 (1.00)
Married couples Number 434,000 27,800 573, TOO

with one Median Age
dependent of Head 38.7 yrs 51.9yrs 40.6yrs
child Median Net
1 ncome $ 12,200 (0.91) $ 5,760 (1.13) $ 11,850 (1.13)
Mean Net
Income $ 12,920 (0.94) $ 5,230 (0.97) $ 12,770 (1.09)
Married couples Number 588,000 24, TOO 795,500

with two Median Age
dependent of Head 36.7yrs 42.9yrs 37.2yrs
children Median Net
Income $ 12,540 (0.93) $ 5,350 (1.05) $ 12,380 (1.18)
Mean Net
1 ncome $ 13,280 (0.96) $ 4,660 (0.86) $ 13,430 (1.15)
Married couples Number 374,900 32, 300 524,300

with three or Median Age
more dependent of Head 39.yrs 42.8yrs 39.3yrs
children Median Net
Income $ 13,240 (0.98) $ 6,350 (1.25) $ 12,740 (1.21)
Mean Net
Income $ 13,930 (1.01) $ 5,890 (1.09) $ 13,660 (1.17)
Sol e parents Number 50,400 49,200 109,400

with one Median Age
dependent of head 37.4yrs 33.3yrs 35.8yrs
child Median Net
Income $ 7,990 (0.99) $ 3,920 (0.77) $ 5, 100 (0.48)
Mean Net
Income $ 8,210 (0.59) $ 3,760 (0.69) $ 6, 180 (0.53)
Sole parents Number 24, 100 74,800 109,300

with two or Median Age
more dependent of Head 38.9yrs 33.3yrs 35.4yrs
children Median Net
Income $ 9,130 (0.68) $ 4,640 (0.91) $ 5, 300 (0.50)
Mean Net
Income $ 11,420 (0.83) $ 4,710 (0.87) $ 6,620 (0.35)
One person Number 1695,700 833,300 2,773,500

units Median Age
of Head 23.4yrs 67.1yrs 29.5yrs
Median net
Income $ 6,450 (0.48) $ 2,850 (0.56) $ 4,850 (0.46)
Mean Net
Income $ 6,610 (0.48) $ 3,050 (0.56) $ 5,620 (0.48)
TOTAL Number 3,953,400 1,425,600 6,325,900

Median Age
of Head 32.8yrs 66.0yrs 39.5yrs
Median Net
Income $ 9,700 $ 3,620 $ 8, 020
Mean Net
Income $ 10,530 $ 3,930 $ 9,320
* Includes income units whose principal source of income was from business
or farm, partnership, superannuation, Interest, rent or dividend and other.
(A) Figures In brackets are equivalence scales Implicit in the level of median
and mean net incomes.
SOURCE: Australian Bureau of Statistics, Income Distribution, Australia
1978-79: Income Units (Catalogue No. 6523.0)
24
A related but slightly different way of determining equivalence

scales that also appears conceptually consistent with the
relative approach to poverty measurement is to analyse the
distribution of average household expenditures rather than
income. Some resultant relativities are shown in Table 2.7,
which indicates the equivalences implicit in the distribution of
average household expenditures by household composition and
income in Australia in 1974-75. In the majority of cases these
relativities are "a priori" more reasonable than those implicit
in the distribution of incomes, presumably reflecting the fact
that, at least in the short term, people's expenditures more
closely approximate their needs than do their incomes. The major
problem with and interest of these relativities is the influences
they partly conceal. For example, households of one adult show
marked differences in relativities according to income level. In
the case of single adults in the lowest income group, however,
there is the problem that most of this group are likely to be age
pensioners, so that compared to low income couples without
children, who are also particularly likely to be pensioners,
their apparent patterns are in turn determined by the
differential level of pensions for single adults and married
couples. The results for single adults, which increase at higher
income levels, are also interesting; there are at least three
possible interpretations - first, that the relative needs of
single individuals increase with income; or second, that single
individuals are more likely to achieve higher standards of living
than married couples; or third that the results in the table,may
be affected by unknown differences in labour force participation,
i.e. single adults at higher income levels are all likely to be
working, while there is a possibility that some wives in higher
income married couple households without children are not
working. (For a very detailed review of the evidence provided by
an analysis of average household expenditures, see Manning,
1984.)
Further light is thrown on these issues by the analysis by Cass,

Keens and Wyndham (1983) of the 1974-75 and 1975-76 Household
Expenditure Surveys. In the context of preparing estimates of
the direct and indirect costs of raising children, they show that
in low income households average expenditures exceed average
incomes to a very large extent, suggesting that these households
are prone to indebtedness (pp. 22-26). The disproportion between
incomes and expenditures in low income households can have
significant effects on the apparent relative needs of these
units. It suggests that attention should be focused on
indebtedness and ability to borrow, as well their obverse -
savings or other asset holdings.
The findings of these analyses have been presented in some detail
because they show that the relative income approach to poverty
measurement, in the sense discussed, provides no real answer to
the problem of determining the relative needs of different
families, or its sub-index, the poverty line needs of different
families. Nevertheless, these results lead towards the type of
25
Table: 2.7 Equivalence scales implicit in the distribution of average household

expenditures by household composition and household income, Australia
1974-75
Household Income ($ per week)

Household Type
$80 $140 $200 $260
Under $80 and under and under and under and under $340 and Total
$140 $200 $260 $340 over
One adult 0.64 0.82 0.85 0.98 0.86 0.78 0.54

One adult plus
children 1 . 34 1 . 00 1.13 1.37 0.88
Two adults and
no children 1 . 00 1 . 00 1.00 1.00 1.00 1.00 1.00
Two adults and
one child 1 . 85 1 . 20 1.05 1.09 1.03 0.99 1.15
Two adults and
two children 1 . 85 1 . 30 1. 11 1.13 1.09 1.09 1.22
Two adults and
three children 2.07 1.32 1.14 1. 16 1.12 1.22 1.30
Two adults and
four or more
children 1.98 1.16 1.24 1.19 1.30 1.38
SOURCE: Australian Bureau of Statistics, Household Expenditure Survey_ 1974-75. Bulletin

6, (Catalogue No. 6512.0), Tables 6.3 to 6 . l O
26
analysis that follows from the theory of consumer behaviour in

economics. Tables 2.6 and 2.7 illustrate a "naive" way of
determining the relative needs of different family types from the
actual incomes achieved by different families and from the actual
expenditure patterns of families. But they also show that such
analysis requires additional information on the level of income,
the number of children, the age and labour force status of
household members, and perhaps the extent of indebtedness or
level of assets of different types of families.
The silence of the relative income approach on the issue of
equivalence scales is indicative of the fact that this approach
says nothing about the actual living standards of low income
groups. As Townsend notes, as far as the measurement of poverty
goes, this method produces no more than "a band of low incomes of
somewhat arbitrary width" (1979, pp. 248-249). Theories of
consumer behaviour in economics do systematically attempt to take
account of the details of individual living standards in devising
measures of economic welfare. But in the literature of poverty
research, only one work has developed a systematic theory for the
measurement of living standards that attempts to take account of
the detailed factors discussed above.
2.6 Townsend and relative deprivation (8)
Peter Townsend's alternative approach to the definition and
measurement of poverty was developed in a series of articles
starting in the early 1960s and reached its fullest expression
with the publication of Poverty in the United Kingdom in 1979.
Along with Atkinson and Abel-Smith(9), he was an early
proponent of the relative income approach to poverty measurement,
but his subsequent work has attempted to remedy the deficiencies
of that method. According to Townsend, previous approaches to
measuring poverty have been oversimplified or misleading or
inconsistent. Townsend argues that conceptions of "absolute"
deprivation, such as those implicit in Rowntree's surveys for
example, disintegrate upon close and sustained examination -
people's needs, even for food, are conditioned by the society in
which they live, and just as needs differ in different societies,
so they evolve over time within a single society.
(8) For a more detailed review of Townsend's Poverty in the

United Kingdom (1979) and the debate it has provoked, see
Whiteford (1981) .
(9) See, for example, A.B. Atkinson, Poverty in Britain and the
Reform of Social Security (1969) and B. Abel-Smith and P.
Townsend,The Poor and the Poorest (1965).
27
Indeed, "needs arise by virtue of the kind of society to which

individuals belong. Society imposes expectations, through its
occupational, education, economic and other systems, and it also
creates wants through its organisations and customs" (p.50).
For example, tea is nutritionally worthless, but in some
countries it is generally accepted as a necessity of life, in the
sense that for many people drinking tea has been a life-long
custom and is psychologically essential. The fact that friends
and neighbours expect to be offered a cup of tea (or its
equivalent) when they visit makes it socially necessary as well.
The environment and expectations can create needs in an objective

as well as subjective sense. Society expects parents to provide
certain things for their children, so the goods and services
provided at all stages of childhood are socially controlled by
law, the school system and the mass media. Again, if unemployed
people are to get jobs they are expected to conform to certain
standards of dress and appearance. "Laws and norms are in
delicate interdependence with need" (p.51). Poverty is
historically relative as well. New legislation is passed:
housing standards and therefore housing costs are raised;
changes in the balance of public and private transport imply
changing expenses; raising the school leaving age or increasing
the educational standards required for certain jobs mean that
people's needs change over time. As a consequence, any
conception of poverty as "absolute" is misleading and deserves to
be abandoned. While subsistence or budgetary definitions are
based on a concept of some "absolute" level of human needs, in
practice they represent narrow conceptions of relative
deprivation.
The relative income approach to poverty measurement is also
narrow, but in a different sense. Such measures usually take
account only of cash incomes and not other resources. More
importantly, it is simply assumed that some arbitrary low income
figure or some degree of unacceptable inequality constitutes
poverty. In retreating from the idea that it is possible to
determine absolute needs, the relative income approach also
denies poverty measures the opportunity of looking at the actual
styles of living of the population. Townsend therefore attempts
to recast the debate about absolute and relative needs. He
insists that "relative" poverty is as real as so-called
"absolute" poverty. The distinction often made between the two
is artificial.
Townsend's main conclusion is:
Poverty can be defined objectively and applied consistently
only in terms of the concept of relative d e p r i v a t i o n .
The term is understood objectively rather than subjectively.
Individuals, families and groups in the population can be
said to be in poverty when they lack the resources to obtain
the type of diet, participate in the activities and have the
living conditions and amenities which are customary, or are
at least widely encouraged or approved, in the societies to
which they belong. Their resources are so seriously below
those commanded by the average individual or family that
they are, in effect, excluded from ordinary living patterns,
customs and activities (p.31).
28
This point of view is not new. In 1776 Adam Smith (10) stated
that "by necessaries I understand, not only the commodities which
are indispensably necessary for the support of life, but whatever
the custom of the country renders it indecent for creditable
people, even of the lowest order, to be without" (quoted in
Townsend, 1979, p. 32n). The specific concept of relative
deprivation is derived from the work of sociologists - Stouffer,
Merton and Runciman -who used it to denote feelings of
deprivation relative to others. Townsend expanded the concept to
refer to conditions, not only feelings, and distinguished such
objective deprivation from conventionally acknowledged or
normative deprivation and individual or group subjective
deprivation. All are important in considering people's relative
welfare, poverty or needs.
In contrast with the relative income approach, Townsend's concept
of relative deprivation involves the detailed analysis of
people's styles of living and their resources. Style of living
is the set of customs and activities which people are expected to
share or in which they are expected to join. Conformity is not
rigidly prescribed. People engage in the same kind of activities
rather than the same specific activities, just as they select
from a fairly limited and familiar range of foodstuffs or other
commodities. Different but overlapping sets of activities are
expected of people of different age and sex and family
membership. Communities differ according to geographical
situation, composition and the kind of resources that are readily
available to them. The style of living of a society consists
more of elements which are heterogeneous, but ordered and
interrelated, rather than rigidly homogeneous. Any attempt to
define this style and represent it in some form of operational
index or poverty line, so that the conformity of a population can
be measured statistically, is bound to be rough and ready. It
might be added that the problem is perhaps analogous to that of
measurement of intellectual ability, for example, or educational
achievement where instruments of some value can be developed
although it may not be clear exactly what is being measured.
Townsend argues that broad measures of resources should replace
simple income measures in the study of inequality and poverty and
also "style of living", as discussed above, should replace
"consumption" (or more narrowly still, "nutritional
requirements") in determining what levels in the ranking of
resources should be regarded as constituting deprivation.
Townsend's measure of resources included all forms of cash
income, capital assets, the value of employment benefits and of
public social services, as well as various forms of private
income in kind. Townsend tentatively hypothesised that, "as
resources for any individual or family are diminished, there is a
point at which there occurs a sudden withdrawal from
participation in the customs and activities sanctioned by the
culture. The point at which withdrawal 'escalates'
disproportionately to falling resources could be defined as the
poverty line".(p.57)
It should be noted that this statement refers to tne issue

of commodity taxation rather than to that of defining
poverty.
29
In order to test this hypothesis, a list of sixty indicators of

the "style of living" of the population was built up. This
covered diet, clothing, fuel and light, home amenities, housing
and housing facilities, the immediate environment of the home,
the characteristics, security, general conditions and welfare
benefits of work, family support, recreation, education, health
and social relations. These indicators were expressed as
indicators of deprivation - for example, lacking an amenity or
not participating in an activity. By applying the indicators to
individuals and families, a score for different forms of
deprivation was added up - the higher the score, the greater the
deprivation. A summary "deprivation index" was compiled, and is
shown in Table 2.8. The correlation between nearly all these
indicators and different measures of resources was found to be
highly significant.
The mean individual score for the entire U.K. sample was 3.5. A
score of 5 or 6 or more was regarded as highly suggestive of
deprivation. Twenty per cent of households scored an average of
6 or more. As discussed previously, Townsend had hypothesised
that there was a threshold of income for different types of
household, below which people were disproportionately deprived.
Townsend argues that, while not conclusive, the evidence from the
survey suggested that such a threshold or poverty line did exist.
Analysing the modal deprivation score at different levels of
income, he found that as income diminished so deprivation
steadily increased but at incomes below 150 per cent of the
supplementary benefit standard deprivation began to increase more
swiftly. Thus this measure appears to distinguish a condition of
deprivation distinct from the style of living of those at higher
income levels - in a word, poverty. As Schott and Kellner put
it:
For a family with two children, the change-over today occurs

at about 2,500 pounds: if incomes fall lower, indices of
deprivation accumulate fast. Meat-eating becomes irregular,
and diet-management today is difficult without a
refrigerator. Visits to friends and relatives become rare,
because transport costs are prohibitive. There is nowhere
safe for the children to play, and the home isn't adequately
heated. Holidays and birthday presents become rare, or non-
existent. There need not be anything spectacular or
dramatic about the condition of poverty produced - although
outright catastrophe, now, is never far away. Quietly,
unnoticeably, the family drifts out of the mainstream of
British life, with little prospect of a return (quoted in
Whiteford, 1981 p. 67).
The income levels below which different types of households are
thus disproportionately deprived constitute the equivalence
scales. These scales are shown in Table 2.9. Apart from showing
relativities for different household size and adult/child
composition, they allow for costs associated with
working, costs associated with varying degrees of disability, and
30
Table 2.8: Components of the deprivation index
Characteristic % of population
with characteristic
1. Has not had a week's holiday away

from home in last 12 months 53.6
2. (Adults only). Has not had a relative

or friend to the home for a meal or
snack in the last 4 weeks 33.4
3. (Adults only. Has not been out in the

last 4 weeks to a relative or friend
for a meal or snack 45.1
4. (Children only under 15). Has not

had a friend to play or to tea in
the last 4 weeks 36.3
5. (Children only). Did not have

party on last birthday 56.6
6. Has not had an afternoon or
evening out for entertainment in
the last 2 weeks 47.0
7. Does not have fresh meat

(including meals out) as many
as 4 days a week 19.3
8. Has gone through one or more
days in the past fortnight
without a cooked meal 7.0
9. Has not had a cooked breakfast
most days of the week 67.3
10. Household does not have a
refrigerator 45.1
11. Household does not usually
have a Sunday joint (3 in 4 times) 25.9
12. Household does not have sole

use of any 4 amenities indoors
(flush WC; sink or washbasin
and cold-water tap; fixed bath
or shower; and gas or electric
cooker) 21.4
SOURCE: Townsend, 1979, p. 250.

31
for costs varying by the age of children, but not apparently by

the age of adults (11). Nor do the scales distinguish costs by
sex. These scales are therefore quite detailed, if not so
detailed as those used by the Commission of Inquiry into Poverty
in Australia. Townsend's scales are quite similar in structure
to the Henderson relativities; indeed the scales for couples
with and without children and where neither the head nor spouse
work are very close to Henderson's. Generally, however, the
Henderson scales allow more for children, allow relatively more
for single persons, and indicate greater costs associated with
working.
An appraisal of the Townsend equivalence scales must be based on
an assessment of Townsend's method of determining poverty lines.
There are three issues for resolution -
is the concept of poverty as relative deprivation
credible?
if so, is the idea that there are specific income
levels for different families (or poverty lines) below
which relative deprivation disproportionately increases
credible?
- if so, have these concepts and situations been

measured appropriately and accurately?
These questions are inter-related, but unfortunately, much of the
critical discussion provoked by Townsend's Poverty in the United
Kingdom has confused them.
One of the most common criticisms made of Townsend's concept of
relative deprivation is that it confuses poverty with
inequality. Donnison reports that he was asked by a BBC
interviewer: "Is there any real poverty today? Or is it all
Townsend-type relative poverty?" (quoted in Whiteford, 1981,
p.68) It has been claimed that, by poverty,Townsend means no more
than the absence of facilities that the middle class takes for
granted. The Social Welfare Policy Secretariat's Report on
Poverty Measurement questions whether "failure to take holidays
or entertain friends is really what we mean by poverty. Indeed,
more than half of the British population, according to some of
the indicators, was deprived" (1981, p. 50). T. H. Marshall
disagrees with Townsend's statement that poverty can be defined
objectively and applied consistently only in terms of the concept
(11) On page 269 of his work, Townsend does show relative

deprivation poverty lines for persons over and under 60.
However, this appears only to be a way of distinguishing
retired from working persons.
32
Table 2.9: Townsend equivalence scales for selected household types - U n i t e d Kingdom, 1968-69
Household Type Head working Head not working

Single person 0. 71 (0.86) 0. 54 (0.65)
Sole parent, one
child, under 10 0.88 (1.06) 0.71 (0.86)
Sole parent, two
children, both under
10 1.04 (1.25) 0.88 (1.06)
Sole parent, three
children, one 10-15, 1.13 (1.36)
two under 10 1.29 (1.55)
Spouse Spouse Spouse
Working not working not working
Couple, no children 1.06 '(1.28) 1.00 (1.20) 0.83 (1.00)
Couple, one child
under 10 1.23 (1.48) 1.17 (1.41) 1.00 (1.20)
Couple, two children
both under 10 1.40 (1.69) 1.33 (1.60) 1.17 (1.41)
Couple, three
children, one
10-15, two under
10 1.65 (1.99) 1.58 (1.90) 1.42 (1.71)
Note: The figures in brackets are the relativities derived if a couple with the head not working
is taken as the base. For each person with an appreciable disablement, add 0.17 (0.20), with
a severe disablement, add 0.33 (0.40), and with a very severe disablement, add 0.50 (0.60).
SOURCE: Townsend, 1979, pp. 268-269.
33
of relative deprivation, and notes: "one may reasonably argue

that a poverty line is something which everybody has a right to
be above. But can one maintain that all those forms of relative
deprivation so meticulously examined and assessed by Townsend are
imbued with the same quality of a right denied?" (quoted in
Whiteford, 1981, p. 68). Wedderburn asks "whether there is not
room in our conceptualization of poverty for both an absolute (or
nutritional) standard as well as a relative (or cultural)
standard?", and quotes Sen - "There is an irreducible core of
absolute deprivation in our idea of poverty which translates
reports of starvation, malnutrition and visible hardship into a
diagnosis of poverty without having to ascertain first the
relative picture. The approach of relative deprivation
supplements rather than competes with this concern with absolute
dispossession" (quoted in Whiteford, 1981, p. 68).
Much of this criticism simply does not come to grips with the
arguments explicitly advanced by Townsend. It is necessary to
decide for ourselves what is meant by poverty in a society such
as Australia or the United Kingdom. As discussed previously,
absolute standards for clothing or housing cannot be developed
and even absolute standards of nutrition are chimerical, as the
nutritional requirements of individuals are determined by the
social activities they engage in. Nevertheless, accept for the
moment that there is some sort of absolute standard in terms of
the food necessary to avoid starvation. But it is reasonable to
suggest that nowhere in Australia, even in the most
disadvantaged or isolated community, is there the misery or
malnutrition experienced in Bangladesh or the Sahel. Does this
mean there is no poverty in Australia? The answer to such a
question must ultimately, of course, be a matter for individual
judgement. But if we identify the term poverty only with
starvation, then the standard proposed is literally meaningless
in Australian society. Poverty research is generally concerned
with determining the adequacy of social provisions and with
investigating actual living conditions. In this context, to
propose a meaningless standard is simply to be irrelevant.
There are two ways of attempting to bypass this problem. One is
to discard the concept of poverty as neither useful nor
meaningful, and instead assess the effectiveness of social
policies and the welfare of the community with reference to
inequality alone. For instance, information could be collected
on the distribution of resources, and to emphasise the situation
of those in the bottom part of the distribution, some arbitrary
lines could be drawn. The characteristics of those below these
lines could then be compared with the characteristics of the
population as a whole. This is one of the approaches adopted in
the SWPS Report on Poverty Measurement. This method was also
part of what Townsend did when using the relative poverty
standard of 50 per cent of mean family income, and it is the
approach embodied in the "Fuchs point" poverty line, as discussed
in Section 2.5. But as shown previously, while this sort of
relative income approach may direct attention to the underlying
problem of inequality, it is abstract and information-poor, and
is of very limited use in determining the adequacy of social
security payments as it apparently eschews the question of
34
determining needs altogether. There is also a problem of

consistency. The logical conclusion to be reached from the
relative income approach is that the social and economic problems
of distribution will remain until absolute equality of resources
is achieved. Opting for anything less than absolute equality
must involve some judgements about what is an acceptable or
unacceptable level of inequality. But this simply recreates the
problem of defining poverty in another guise.
The alternative is to accept that the term "poverty" can have

meaning, and then attempt to develop a definition - somewhere
between the totally absolute and the totally relative poles -
that persons concerned about poverty can debate and perhaps agree
on. This is what Townsend (and many other poverty researchers)
has actually attempted to do.
His approach to the definition and measurement of poverty offers

several advantages. The scope of poverty research is widened,
and the definition of needs and resources is clearly more
comprehensive than in earlier works of poverty research. The
poverty line itself is consistent with the definition of poverty.
Townsend argues more specifically that this approach will also
allow the measurement of the contributions made by different
resource systems to both poverty and inequality; it will allow
total and partial poverty to be distinguished - some people will
lack a minimal share in all resource systems, others in only
some; recognising this will assist in the development of better
directed and differentiated social policies - it will be possible
to determine which of the systems underlying the distribution of
resources can be manipulated most efficiently to reduce poverty;
and this approach will also allow the differences between
temporary and long-term poverty to be seen. According to
Townsend, this approach is objective, in the sense that the
underlying set of value premises is made explicit, external and
real social conditions are studied, and the poverty line would be
derived from the results of the survey, rather than from
arbitrary preconceptions about what does and does not constitute
an inadequate income.
The most important component in an appraisal of Townsend's

concept of poverty, however, is whether it is considered that
relative deprivation is the most appropriate framework in which
to rank and measure standards of living. To recapitulate, two
partly conflicting ideas underlie many of the criticisms of
Townsend's approach - first, that relative deprivation is not
real poverty and second, that the focus of concern should be
inequality rather than poverty. In regard to the first, Townsend
points out that much of this argument is based on inconsistent or
idiosyncratic concepts of poverty, on the assumption that poverty
must be Dickensian to be real. Such criticisms appear to ignore
Townsend's own analysis of the subsistence approach to measuring
poverty. After reviewing Rowntree's studies of poverty in York
in 1899, 1936 and 1950 and the official U.S. poverty lines,
Townsend argued: "though the principal definitions put forward
historically have invoked some 'absolute' level of human needs,
they have in practice represented rather narrow conceptions of
relative deprivation and deserve to be clarified as such" (p.38).
That is, "absolute" poverty is not any more real than relative
deprivation, because people's needs are relative to social
institutions and practices.
35
It has been shown that the two extreme views - that poverty is
either a condition bordering on starvation or any deviation from
absolute equality - are of very limited usefulness in an analysis
of social conditions. If, therefore, it is accepted that there
is a continuum of standards of living between starvation and
equality, and that poverty can be defined below a point or band
somewhere along that continuum, then the case for Townsend's
general conception is compelling. That is, poverty can or should
be thought of as the economic threshold for participation in the
normal life of a given society.
There is, however, the second range of issues for consideration.
If poverty is conceptualised in terms of participation and non-
participation in the normal activities of society, then is the
idea credible that there is a set of equivalent income levels or
poverty lines below which people cannot participate in social
activities and above which people can? Views about this differ.
For instance Tulloch notes:
"The principle of validity requires that the definition of
poverty demonstrates a difference in kind as opposed to
degree, between the poor and the rest. Poverty is
'something different', more than just another dimension of
inequality. Like disease it must appear to be a 'real
phenomenon', its attribute to exist in concrete reality -
and not in the eyes of the beholder" (1980, p. 16).
Tulloch argues that the distinction between the poor and the rest
of society cannot be sustained and that it seems difficult,
if not impossible, to give priority to a particular definition of
poverty on factual grounds -
"The 'real phenomenon' view of poverty is difficult to
support. It is not the 'facts' which determine the value
position, but the other way round. Poverty is a label which
the researcher, for moral, emotive, and political reasons,
applies to a particular level of inequality. It is
essentially a value judgement, expressing preferences about
social change and the shape and nature of society" (1980),
pp. 17-19)
A similar view is reached in the SWPS Report on Poverty
Measurement which concluded that none of the methods proposed
for measuring poverty are entirely satisfactory, and "in
particular, we do not feel that any of the criteria which we have
discussed would allow us to state with any confidence whether the
money amounts of pensions and benefits were adequate or not" (p.
60) .
The force of this argument arises from the fact, as shown in

Section 2.4 and 2.5 , that nearly all poverty research to date
has failed to satisfy such apparently simple criteria as
consistency or reliability. This is partly because of the
complexity of the social situations being analysed - people's
resources are varied and their styles of living are heterogeneous
- partly because of the many practical compromises that must be
made in applied social research, and partly because researchers
have been more interested in getting onto the important work of
measuring "real poverty" rather than precisely defining what they
mean by the term.
36
Nevertheless, the "Tulloch - SWPS" argument, in the form in which

it is presented above, is unconvincing. The weakest counter-
argument is that Townsend did in fact discover situations of
participation and non-participation by which it is possible to
derive a poverty line and a set of equivalence scales. But the
resulting "did" - "did not" argument is unresolvable. More
importantly, it can be argued that concepts of poverty and
equivalence do refer to real phenomena. As Schott and Kellner
put it: "recognising poverty in individual cases is not so hard
for anyone who is prepared to look measuring the incidence of
poverty throughout the country is more difficult and more
abstract" (quoted in Whiteford, 1981, p. 79). If poverty can be
recognised in individual cases - and this seems undeniable - then
poverty is real and it is possible to say whether the money
amounts of pension and benefit are adequate or not. The main
difficulties involved are first, that of reaching agreement about
whether each individual case represents poverty or not, and
second, that of generalising from individual cases of poverty to
the national situation. The second difficulty is a genuine
limitation of poverty lines and equivalence scales. Absolute
generalisation of the individual case is impossible. As Manning
notes, equivalence scales provide a "spuriously precise measure
of an approximate concept" (1984, p. 2). The same can be said of
poverty lines. Because family circumstances are so diverse and
because individual families will do very different things with
the same amount of money, a poverty line and a set of equivalence
scales will only show the income level at which, on
average, different types of families fail to achieve an adequate
standard of living. In this sense, the negative conclusion that
there is no single, valid ascertainable poverty line or
equivalence scale is strictly correct. The idea that there is an
authentic set of income levels below which everyone is poor and
above nobody is not plausible. But all this means is that
poverty lines and equivalence scales are no different from any
other social or economic indicator such as average weekly
earnings or the consumer price index.
One specific limitation of the Townsend equivalence scales should
be noted. Since they represent poverty line thresholds for
different families, it is doubtful whether the scales can be
applied to higher income groups. It might be possible to derive
an "affluence threshold" as being constituted by a
disproportionately low score on the deprivation index, but there
are obvious difficulties with using a poverty concept in this
way. It would, however, presumably take an entirely new survey
that dealt with power and control of resources and their
relationship to styles of living to investigate fully the
relative capacity to pay of high income families.
Is Townsend's index of relative deprivation a well-constructed
social indicator that accurately and appropriately measures
poverty? Some of the criticisms of Townsend's approach are
simply based on misconceptions about the index of relative
deprivation. Townsend specifically stressed that no one
indicator alone could be sufficient to show poverty -
37
No single item by itself, or pair of items by themselves,

can be regarded as symptomatic of general deprivation.
People are idiosyncratic and will indulge in certain
luxuries or apply certain prohibitions, for religious,
moral, educational and other reasons, whether they are rich
or poor. Families in certain situations are not necessarily
deprived if they do not have a week's holiday; or if they
do not have an afternoon or evening outside the home; or if
they do not have a Sunday joint, because they may have other
compensating activities or customs. That is why deprivation
is difficult at the margin to detect. (1979, p. 252)
The deprivation index should be assessed as an index. It was not
simply an arbitrary selection of household characteristics. The
relationship between most of the indicators of deprivation and
income was highly significant.
An important issue is raised by Piachaud, who argues that the
index of relative deprivation cannot distinguish between
differences in style of living that represent different tastes or
choices and those which derive from limited opportunities and,
therefore, it cannot distinguish poverty. But, for a person to
score 6 on the deprivation index, it appears that it would be
necessary to miss out on 9 of the 12 amenities or activities. It
is conceivable that such a score could be entirely due to
differing tastes, but it then needs to be asked how people's
preferences would change if their resources and opportunities
were increased.
Nevertheless, there are major difficulties with the deprivation
index. Piachaud notes that the mean deprivation score rose as
income fell, but this mean score concealed the extent of
variation between people at the same income level. While 58 per
cent of people in the poorest 5 per cent of households
experienced severe social deprivation, 10 per cent of those in
the richest households also were severely socially deprived.
This seems problematic. It may reflect the fact that in rich as
well as poor households there are individuals who are disabled,
isolated or lonely. Again, 12 per cent of individuals in the
very poorest households (income less than 80 per cent of the
supplementary benefit standard) scored less than 2 on the
deprivation index. This may arise because deprivation was
examined in relation to incomes rather than a more comprehensive
measure of resources.
More seriously, Townsend does not provide sufficient information
to evaluate fully the deprivation index. It is surprising that a
work otherwise so comprehensive does not more exhaustively
analyse the customs and styles of living of the U.K. population.
In the absence of such analysis, Townsend notes: "In practice,
we sought only to ensure that all major areas of personal,
household and social life were represented. At this
experimental stage, we wished to examine the relationship between
participation in customary amenities and activities (as measured
by indicators selected on the basis of pilot interviews and
knowledge of previous studies of life styles and amenities) and
the distribution of income and other resources" (p. 251). More
justification than this is required. Moreover, the rationale for
the selection of the 12 summary indicators is not fully
38
explained. It would be important to know how sensitive

Townsend's results were to the particular components of the index
- whether the poverty standard would change if some activities
were dropped and others added. There is no information on the
actual construction of the index. It appears from one of the
tables that the highest possible score is 8, but this is not
specifically stated in the text. The weighting of the various
components of the index is not discussed. There is no
explanation why a score of 5 or 6 or more was "regarded" as
"highly suggestive" of deprivation.
A more fundamental issue is the heterogeneity of styles of living
within society and the existence of sub-cultures or distinct
classes within society. As noted above, Townsend is well aware
of this and describes style of living as having elements which
are ordered and interrelated rather than rigidly homogeneous.
The components of Townsend's deprivation index should have their
equivalents in any society or sub-culture, but it is questionable
how relevant the components in Table 3.6 would be overall to
groups such as Asians or West Indians, for example, in British
society. In an ethnically diverse society, or in one with very
strong class divisions, it might be necessary to construct a
number of deprivation indexes. A more comprehensive appraisal of
the significance of various sub-groups and the credibility of a
national style of living would have been valuable.
The deficiencies of the index of relative deprivation do not
necessarily mean however, that Townsend's concept of poverty as
relative deprivation is mistaken. Greater care needs to be taken
if this approach to the measurement of poverty is to be realised
in practice. Townsend's relative deprivation index is a
beginning, rather than the last word in poverty measurement.
2.7 Conclusion - poverty measurement and equivalence
This review of the literature on poverty measurement and its
implications for the determination of equivalence scales has
shown that much of this literature has over-simplified these
complex problems. In addition, each of these approaches has its
own specific weaknesses - lack of consistency between the methods
of determining poverty lines and equivalence scales being notable
in some cases. In other cases the equivalence scales and poverty
lines determined cannot be assessed separately - the two
processes are inextricably linked. It may be desirable that this
should be so. Nevertheless, the whole of the literature on
poverty measurement does have one unifying theme - that living
standards, in particular poverty standards, can be observed
directly. It is this which distinguishes the poverty tradition
from the alternative approach of theories of consumer behaviour
in economics, in which there is no attempt to directly observe
standards of living, but rather the cost of a constant standard
of living is inferred.by the application of an estimating
technique to data on household income and expenditure patterns.
39
It has been seen that successive researchers have been aware of

the weaknesses of previous poverty studies, and have attempted to
remedy these problems. Townsend's Poverty in the United
Kingdom must be considered to provide the most comprehensive
approach to the analysis of social conditions that this tradition
has yet produced. His approach brings the reality and the multi-
dimensional nature of poverty back into focus. His concept of
relative deprivation, as measured by indicators of style of
living, holds out the possibility of greatly contributing to our
understanding of poverty in a way that more limited income
measures cannot. Townsend's approach is more consistent than
earlier poverty research, which usually assumed that standards of
living could be directly observed in some ad hoc or unstructured
way. Townsend proposes a consistent theory to relate relative
deprivation to resources and to styles of living.
Importantly, this theory also differs from the approach of
economic theory. Townsend provides a sociological theory which
explains how living standards are determined by the structure of
society. In contrast, the economic theories, to which the paper
now turns, explain the determination of living standards in
terms of individual behaviour.
40
3. THEORIES OF CONSUMER BEHAVIOUR IN ECONOMICS
3.1 Data Sources

The main sources of data for equivalence scale analysis using the
methods derived from economic theory are surveys of household
expenditure and income. The major Australian sources are the two
Household Expenditure Surveys (HES ) conducted by the Australian
Bureau of Statistics (ABS) between June 1974 and June 1976.
These surveys were designed to collect information on households'
patterns of expenditure on goods and services, together with data
on such variables as household size, composition, age,
occupational status of the household head and income. The
information collected is very detailed; for example, the 1974-75
HES provides information on over 100 different types of
expenditure, including 35 food items, 10 clothing items and 9
categories of recreational or educational spending.
These surveys built on previous Australian and overseas
experience. The first limited attempts to conduct a household
expenditure survey in Australia occurred in 1910-11. An Inquiry
into the Cost of Living in Australia was undertaken by the then
Commonwealth Bureau of Census and Statistics. This involved
approximately 1,500 volunteers keeping records of all expenditure
over the period July 1910 to June 1911. A further expenditure
survey was conducted in 1913, with diary keeping restricted to a
four week period. The response rate in both surveys was very
poor .
A number of surveys of household income and expenditure have been
conducted in more recent years by Australian universities. The
most important of these is the 1966-68 Australian Survey of
Consumer Finances and Expenditure, conducted jointly by Macquarie
University and the University of Queensland under the supervision
of Professors H.R. Edwards, R.C. Gates and N.T. Drane. This
Australia-wide survey of families living in urban areas was
intended to provide a comprehensive picture of assets,
liabilities, income and expenditure patterns, together with a
range of data on socio-demographic characteristics. Particular
doubts have been expressed about the representativeness of the
sample and about the accuracy of these data - major problems
include non-response bias in the expenditure component of the
survey, and low income families apparently understating their
incomes more heavily than households in upper income groups.
Notwithstanding these problems, this survey is still the only
Australian source which combines data on income, wealth and
expenditures.
The Family Expenditure Surveys
Surveys along similar lines have been conducted in the United

Kingdom, the United States, Canada, Japan, Sweden and New
Zealand. The experiences and practices of the U.K. in their
Family Expenditure Survey (FES) were of particular importance to
the ABS when it planned the HES.
41
In the U.K., while interest in the issues of consumption patterns

and costs date back to the beginning of this century, little
research was conducted until the immediate forerunner to the
present FES was undertaken over the 12 months from January 1953.
This survey covered a sample of 13,000 households, and was
conducted on the recommendation of the Cost of Living Advisory
Committee. In considering the results of the survey, the
Committee recommended that small-scale enquiries should be
conducted along similar lines, at frequent intervals, rather than
relying on large-scale studies at lengthy intervals. Family
Expenditure Surveys commenced in 1957. Over the period 1957 to
1966, sample sizes varied between 3,000 and 3,500 households.
From 1967 the sample size was doubled to yield some 7,000
effectively co-operating households. For over 20 years,
therefore, FES has been conducted on a reasonably consistent
basis and has provided a reliable source of data for viewing
changes and developments in household circumstances and
characteristics. The main reason for instituting the survey was
to provide information on spending patterns for the Retail Prices
Index (RPI). In fact, three price indices are produced:
the General Index (the RPI) which covers the vast

majority of households. It excludes households at the
extreme ends of the income distribution because their
expenditure patterns vary markedly from the average.
Households excluded at the upper end of the
distribution represent around three to four per cent of
all households;
an index for one-person pensioner households of limited

means; and
an index for two-person pensioner households of limited

means .
Since 1967 a sample of about 10,400 households has been selected

each year. About 70 per cent co-operate fully, so that results
each year are based on data from approximately 7,000 households.
The number of co-operating households is spread evenly over all
months so that seasonal variations in expenditure are covered.
The information which households supply is collected partly by
interview and partly from records of payments kept by household
members (for a period of 14 consecutive days). In the interview
phase, two questionnaires are completed - one concerned with the
household and its regular expenditure (such as rent and housing
costs, phone, insurance etc), and the other with household
members' income from earnings and other sources. Details are
provided by all adult members of the household. In the
subsequent phase, all persons over 16 years of age keep two
diaries, covering seven days each, and record their day-to-day
expenditure on various types of goods and services. Detailed
questions are also asked about the income of each adult member of
the household, their age, sex and relationship to the designated
"head" of the household.
42
The Family Expenditure surveys have a number of limitations.

They cannot provide accurate, detailed information about small
groups in the population. The results are subject to
inaccuracies arising from failure to gain the co-operation of all
households. It appears that households without children, those
with self-employed heads and those with an older household head,
in particular, are less likely to co-operate. Because response
is linked to the length and complexity of the questionnaires,
there may also be inaccuracies and non-response as a result of
the actual questionnaires used. It has also been found that
specific items of expenditure and income are subject to
inaccurate or incomplete recording (e.g. expenditure on alcohol
and tobacco).
The Household Expenditure Surveys
A range of HES data requirements had been identified as early as
1969 by a working party of the Standing Committee of Officials on
Welfare. The range of data items, cross-tabulations and
classifications within data items required were essentially the
same as those obtained in the U.K. FES.
As with the FES, the main purpose of the HES is to provide
information on spending items, so that each category of
expenditure can be given an appropriate weight in the Consumer
Price Index. The ABS also noted that HES data would have a wide
variety of policy and research applications.
These include the planning of welfare services; assessing
the need for, and effect of, programmes in fields such as
housing, education and health services; assessing the impact
of taxes and government benefits; improving estimates of
private final consumption expenditure in the National
Accounts (ABS, 6507.0, p.10).
The 1974-75 HES was restricted to the six State capital cities
and Canberra in order to satisfy immediate data needs,
particularly for updating the Consumer Price Index, for which
detailed estimates at the capital city level were required.
Darwin was initially included in the survey, but Cyclone Tracy in
December 1974 resulted in the suspension of data collection
there. Information was collected on a household basis from
13,550 private dwellings (from which 12,600 households met the
criteria for inclusion in the survey). Of these, 9,100 supplied
the full range of data required. The 1975-76 HES was conducted
throughout Australia using basically the same concepts,
definitions and methodology. Some 9,600 dwellings were selected
for the survey, of which 8,017 were eligible for inclusion. Of
these, 5,869 households supplied the complete range of data.
Only private dwellings were surveyed - these included houses,
home units, flats, caravans, garages and tents. Military
establishments, hospitals and homes for the aged, religious and
educational institutions, welfare homes, hostels, hotels and
motels, and boarding and lodging houses were excluded. Certain
private households, such as households at an address other than
43
their usual place of residence and not intending to stay at that

address for four weeks or more after the initial interview,
households moving to a new address within seven days of the
initial interview, and households containing foreign diplomats or
their staff or foreign servicemen were also excluded. Others
were not asked to supply information for a variety of practical
reasons such as language difficulties, or because of extenuating
circumstances (e.g. serious illness or recent death of a
household member). Some persons who were members of households
at the time of interview, such as visitors, usual residents
absent at the time of the initial interview and not returning
within seven days, usual residents going away on holiday, and
persons from overseas touring or holidaying in Australia were not
included in the survey.
The ABS decided that a combination of two collection methods
would be most appropriate for the 1974-75 HES - an interview
method for large and infrequent items of expenditure (e.g. the
purchase of motor vehicles), and a diary-keeping method which was
more suitable for collecting day-to-day expenditure. Each of
these methods of data collection has its own advantages and
disadvantages. The interview method allows for greater
reliability and completeness of the data gathered - more detailed
information can be obtained about more important expenditure
items (such as education and health expenses). Its principal
disadvantage is that, since it uses recall questions, the
accuracy of the answers obtained depends on the respondent's
memory or the availability of relevant records, and is therefore
subject to an unknown margin of error. The diary-keeping method
has the advantage that information is recorded as events occur so
that small items are less likely to be overlooked. For small
items which are recorded, the information provided is likely to
be more accurate than if the same information had been asked for
on recall. Some people, however, may be unwilling to keep
diaries for the entire period. In addition, the act of keeping a
diary may influence respondents' spending patterns during the
enumeration period, and some respondents may not follow or may
interpret wrongly the detailed instructions which are needed.
Certain items of expenditure may be inadvertently or deliberately
misreported. Finally, there is little day-to-day control by the
collecting agency over what is recorded or the level of detail
supplied.
Apart from such general problems, there are some specific
difficulties with the use of HES data in equivalence scale
analysis. In order to determine the effects of income level, age
of children or employment status of household head on the costs
faced by different families, it is necessary to disaggregate the
sample by these and other relevant variables. Such
disaggregation runs into the problem of small sample size - there
may simply not be enough households with an unemployed head and
unemployed spouse and three dependent children, for example, for
any meaningful conclusions about their costs to be reached. The
Social Welfare Policy Secretariat's Report on Poverty
Measurement found that this problem of small sample size affected
44
the reliability of estimates for single parent families and

families with dependent children where neither the head nor
spouse worked (1981, p.98). SWPS also found problems with
producing equivalence scale estimates for different regions and
with estimates of how costs vary by age of children, except the
eldest child. I
Further problems may arise because of the way in which different

concepts are actually measured in the HES. These difficulties
are discussed in detail later as they affect different estimation
procedures. One example, however, is that of the income measure,
which relates only to current (weekly) income, and does not
include withdrawals from savings. Thus, the HES measure of
income is very short-term, and in some cases is inappropriate to
the theory underlying different equivalence scale estimation
procedures.
A new Household Expenditure Survey was undertaken over the 1984

calendar year. While this survey will contain some significant
improvements over earlier inquiries, the two specific problems
mentioned here will not be remedied, and the HES's usefulness for
equivalence scale analysis will consequently be impaired.
Suggestions for improving future household expenditure surveys
are discussed in the conclusion to this paper.
3.2 Engel's law and the proportional approach
A number of methods for estimating equivalence scales derive from

the work of Ernst Engel, who in a study of the economic
development of Saxony in 1857 had observed that "the proportion
of outgo (total expenditure) used for food, other things being
equal, is the best measure of the material standard of living of
a population" (Nicholson, 1976, p.l). It is now one of the best
established economic laws that a family's expenditure on food as
a proportion of total expenditure or income decreases as family
income increases. Expenditure on other goods and services such
as heating, lighting or clothing have also been found to decrease
as family income increases. There therefore appears to be a
systematic relationship of some sort between a family's
expenditures on what can be can be termed "necessities" and its
standard of living. Expenditure on these items, singly or in
combination, have consequently been used in a variety of ways as
a measure of living standards and for the derivation of
equivalence scales. Alternatively, scales can be constructed on
the basis of the proportion of total expenditure going to
"luxuries".
This proportional approach can be regarded as an intermediate

stage between the budgetary approach and those approaches derived
from more sophisticated theories of consumer behaviour or utility
theory. For example, the "official" U.S. poverty lines,
developed by Orshansky (1965, 1969, 1975), combine budgetary and
proportional methods (although in essence they are an example of
the budgetary approach). Orshansky concluded that there was no
generally acceptable standard of adequacy for essentials of
living except for food. She took as a basis the amount of money
45
needed to purchase the food for a minimum adequate diet as

determined by food consumption studies undertaken by the U.S.
Department of Agriculture. Studies of household expenditure in
the United States showed that low income families on average
spent one quarter of their income on food. Orshansky assumed
that a family which spent more than one third of its income on
food was in poverty. Poverty lines were therefore set at three
times the cost of the economy food plan, and the equivalence
scales effectively became the ratio of the food plans for
different family types. (Families of one and two persons were
treated somewhat differently - see, SWPS, 1981, pp. 25-26.)
The general approach of analysing the proportion of income or

total expenditure going to food or some other necessity has the
apparent advantages of limiting the number of judgements involved
in deriving equivalence scales, and also of being based to some
extent on the actual expenditure behaviour of households or
families.
The "Canadian" approach

The proportional method has been applied by Statistics Canada (a
body comparable to the (ABS) as part of an attempt to derive
poverty lines and by SWPS in The Report on Poverty Measurement.
Statistics Canada assumed that the standard of living of a
household could be determined by the proportion of income spent
on "necessities". It was also assumed that this proportion was
similar for all household types. Statistics Canada chose
clothing, food and shelter as necessities and, using expenditure
data for Canadian households, calculated the amount spent on
these goods as a proportion of total income. This proportion was
about 50 per cent in 1959 and 42 per cent in 1969 - these are
average figures across all Canadian households. An arbitrary
figure of 20 per cent was then added to give what was called a
"reference level" of expenditure. Households which spent more
than this proportion of income on necessities were deemed to be
in poverty.
The relationship between income and the proportion spent on

necessities was estimated for each type of household using
regression techniques. The level of income for each type of
household at which expenditure on necessities equalled the set
proportion was obtained, giving what was called a "low income
cut-off". The equivalence scales were derived by expressing the
cut-off level for each household type as a fraction of the level
for a standard household. The results are shown in Table 3.1
which compares the original Statistics Canada figures for 1959
with the revised figures for 1969, when the reference level of
expenditure was decreased from 70 to 62 per cent.
46
Table 3. 1: Equivalence scales for Canada using the proportional

method - 1959 and 1969
Household 1959 1969

Size Relativities Relativities
1 0.60 0.69
2 1.00 1.00
3 1. 20 1. 28
4 1.40 1. 52
5 1.60 1.70
6 - 1.86
7 - 2.04
SOURCE: Love and Oja, 1977, pp.40-42.
Table 3.1 shows that the revision of the reference expenditure

level had significant effects on the estimated scales, with the
relativities for single persons and additional individuals in the
household increasing significantly. Clearly, however, these
results are of limited usefulness for policy purposes, since they
do not distinguish between children and additional adults in a
household.
ABS and SWPS essentially replicated the Statistics Canada

methodology, but defined "necessities" as including fuel and
power, as well as food, clothing and housing. Since the average
level of expenditure on "necessities" in Australia in 1974-75 was
35 per cent of average income, the "reference level" of income
was set at 55 per cent of the average. These income levels for
different family types can be regarded as poverty lines, and
their relative levels provide the equivalence scales. Neither
SWPS nor ABS used these estimates as poverty line measures,
although ABS noted that the income level thus derived for a
married couple was at approximately the same value as the pension
level at the time (ABS, 1981, para 4.2). The choice of the
proportion of necessities as 55 per cent was clearly arbitrary,
but did not have a significant effect on the equivalence scale
estimates. While changing the proportion did result in a
relatively large change in the income levels, the scales
themselves were insensitive to this change - typically a change
of 10 per cent in the proportion caused a change of less than 2
per cent in the scale values. Changing the commodities which
constituted "necessities" did, however, have an important
influence, as will be shown.
Table 3.2 shows the basic scales estimated using this method.
47
Table 3.2: Equivalence scales using the "Canadian" approach

Australia, 1974-75
Household Size Scale
1 person 0. 59
2 persons 1.00
3 persons 1. 18
4 persons 1.35
5 persons 1.53
6 or more persons 1.60
SOURCE: SWPS, 1981, p. 105
This table is directly comparable with Table 3.1 and shows that
the results for Australia and Canada were very similar, with
those for Australia generally showing greater economies of scale
for households larger than two persons.
Table 3.3 provides a more detailed disaggregation by family

composition and labour force status, while Table 3.4 shows the
effects of estimating the equivalence scales on the basis of food
alone rather than necessities. While many features of these
detailed scales are reasonable, there are some troubling aspects.
For example, the results indicate that the first child of a
couple where both head and spouse work adds nearly 50 per cent to
family costs, while the second child adds only about 2 per cent.
More seriously, the addition of the fourth child to all types of
families appears to actually reduce relative needs. The
implausibility of these results apparently reflects the
sensitivity of this approach to small sample sizes, and SWPS
therefore rejected the detailed scales. Table 3.4 shows the same
implausibility of results as the number of children increase.
These results are of interest, however, because they illustrate
the considerable differences that arise if the list of
necessities is changed. Using food only to derive the scales
leads to greatly increased estimates of the costs of children,
primarily because of the very limited economies of scale involved
in food consumption.
Other proportional scales

A number of researchers have used different applications of the
proportional approach to estimate equivalence scales. The major
difference is that no other attempts have been made to estimate
poverty lines using this method, and therefore the analyses do
not add in the "reference level" of expenditure. Seneca and
Taussig (1971) analysed data from the 1960 U.S. Bureau of Labour
Statistics Survey of Consumer Expenditures in order to assess
horizontal equity within the personal income tax system. Using
regression techniques they estimated the relationship between
expenditure on necessities and net income. They excluded from
their analysis all households except those containing couples
with and without children and also excluded older couples and
those in rural areas in order to be able to analyse a homogeneous
group (ultimately of some 5,500 households). While experimenting
with a variety of definitions of necessities, Seneca and Taussig
48
Table 3.3 : Detailed equivalence scales using the "Canadian"

approach - Australia, 1 9 7 4 - 7 5 ~
Adults/Children Head Works Head Not Mixed
Wife Wife Not Total Working Labour Force
Works Working Status
1 0 0.69 0.57
1 1 1.10
1 2 1.22
1 3 1.40
2 0 1.02 1.00 1.01 0.93

2 1 1. 50 1.14 1.30
2 2 1.52 1.33 1.41
2 3 1.87 1.67 1.77
2 4 1.83 1.59 1.69
3 0 1.17
3 1 1.92
3 2 1.72
4 0 1.74
4 1 2.55
4 2 2.25
* Mixed estimates depend only on household composition and age

and do not distinguish by labour force status.
SOURCE SWPS, 1981, p.106,
Table 3.4 : Equivalence scales from the "Canadian" approach for

two-adult households where the head works and the
spouse does not - Australia, 1974-75
Household Composition:
Adults Children Food Only All "necessities"
2 0 1.00 1.00
2 1 1.27 1.14
2 2 1.43 1.34
2 3 1. 91 1.71
2 4 1.88 1.59
2 5 2.05 1.63
SOURCE : SWPS, 1981, p. 105.
reported only on the results using food expenditures and using

combined expenditures on food, clothing, housing and
transportation. They generally estimated the relationship
between expenditures on necessities and income separately for
each family type in different income classes, the equivalence
scales being provided by the ratios of the income levels at which
each family type spent the same proportion on necessities. The
resultant scales are shown in Table 3.5.
49
Table 3 . 5 : Equivalence scales using the proportional approach -

United States, 1960
Low Income Medium Income High Income

Scales Scales Scales
(U.S. $3,000p.a.) (U.S. $10,000p.a.) (U.S. $20,000
p. a.)
Household
Composition Food Necessities Food Necessities Food Necessities
Couple ,
no children 1.00 1.00 1.00 1.00 1.00 1.00
Couple ,
one child 1.01 1.07 1.43 1.42 1.29 1.26
Couple,
two children 1.30 1.41 1.76 1.58 1.48 1.39
Couple,
three children 1.64 1.62 2.01 1.74 1.56 1.49
Couple,
four children 2.06 1.86 2.29 1.91 1.63 1.60
Couple,
five children 2.59 2.13 2.61 2.09 1.71 1.71
SOURCE : Seneca and Taussig, 1971, p.257,
While these scales are generally reasonable, aspects of the low

income relativities are implausible. For example, the first
child in a low income family adds between only 1 and 7 per cent
to family costs, while the second child adds around 30 per cent.
The differences between "food scales" and "necessities scales" at
low income levels are also counter-intuitive, as initially the
food results show greater economies of scale than do the
necessities results. It might also be noted that the results at
medium income levels, while showing a plausible pattern, do imply
costs of children significantly higher than that shown by most
other research.
Nicholson (1976) discusses a number of examples of scales derived
from the proportionate approach and provides a good review of the
problems involved with this method. Table 3.6 shows details of
these scales. Overall, these results are similar, except in the
case of the savings scales which show greater economies as
household size increases. Table 3.7 provides details of a
further example of the proportional approach, equivalence scales
derived by Habib and Tawil (1974) from a sample of 2,200 urban
families drawn from the 1968-69 Israeli Family Expenditure
Survey. Habib and Tawil experimented with different baskets of
commodities and also with different functional forms of the Engel
curve expressing the relationship between expenditure on these
commodities, family composition and family resources. The
results varied significantly with the choice of basket and
functional form, and not always in the expected direction.
50
Table 3.6 : Further various examples of equivalence scales using

the proportional approach
Scales
Household Holland, 1917- U.K. 1965- U.S. 1960-61- U.S. 1948-

Composition Food Food Food Savings
expenditure expenditure expenditure
Single adult 0.53 0.54 0.60 0.70

Couple,
no children 1.00 1.00 1.00 1.00
Couple,
one child 1.42 1.31 1.37 1.28
Couple,
two children 1.71 1.55 1.67 1.52
Couple,
three children 1. 95 1.75 1.94 1.73
Couple,
four children 2.13 1. 94 2.20 1.93
Three adults,
no children 1.53 - - 1.28
Three adults,
one child 1. 95 - - 1.52
Three adults,
two children 2.24 - - 1.73
Four adults 2.00 - - 1.52
SOURCE : Nicholson, 1976, p.10. See pp. 10-11 of Nicholson

for further details of these scales and for
references .
51
Table 3.7: Equivalence scales using the proportional approach -

Israel, 1968-69
A. Limited Economies of Scale (Cobb-Douglas Engel Curve)
BASKET OF COMMODITIES
Household Food and Food,

Size Food Clothing Clothing
&
Housing
1 0.58 0.52 0.73
2 1.00 1.00 1.00
3 1.38 1.47 1.20
4 1.72 1. 93 1.37
5 2.05 2.38 1.52
6 2.37 2.82 1.65
7 2.67 3.27 1.77
8 2. 97 3.70 1.88
9 3.25 4.14 1.98
B. Economies of Scale with Income (Quadratic Engel Curve)

Household FOOD FOOD AND CLOTHING FOOD, CLOTHING
Size AND HOUSING
Low Med ium High Low Medium High Low Med ium High
Income Income Income Income Income Income Income Income Income
1 0.44 0.59 0.81 0.02 0.11 0.74 0.77 0.79 0.86

2 1.00 1.00 1.00 1.00 1.00 .00 1.00 1.00 .00
3 1.56 1.31 1.15 1.47 1.42 .18 1.24 1.20 1.24
4 2.11 1.58 1.28 2.91 1.75 .33 1.47 1.39 1.24
5 2.66 1.80 1.39 3.85 2.02 .46 1.71 1.57 1.34
6 3.21 2.01 1.49 4.76 2.27 .57 1.95 1.79 1.44
7 3.75 2.20 1.58 5.66 2.48 .68 2.18 1.91 1.53
8 4.29 2.37 1.67 6.55 2.68 1.78 2.42 2.07 1.62
9 4.82 2.54 1.75 7.43 2.87 1.87 2.65 2.22 1.70
SOURCE: Habib and Tawil, 1974, pp.1-14.

52
Assessment of the proportional approach

There are many reasons for considering that the proportional
approach is unlikely to provide accurate estimates of relative
family needs. The major problem is the underlying assumption
that all households spending the same percentage of their income
on necessities enjoy the same standard of living. This implies
that the addition of a household member, say a child, will have
the same effect on spending on necessities as on total spending
by the household. This is not the case. The fact, as the tables
show, is that the scales differ depending on the definition of
necessities. Taking only some fraction of total expenditures is
a misleading guide to a family's overall standard of living. In
general, there will be an upward bias to the scale results if the
commodities chosen (e.g. food) are necessities rather than
luxuries, or if they are a more important component of a child's
budget than an adult's. There will be a downward bias in the
scale results if the commodities used are both necessities and
subject to economies of scale (e.g. housing). While the
direction of these biases can be investigated, their size will
always be less certain, and it seems unlikely that there is a
partial basket of commodities in which the biases will be off-
setting .
The use of measured income as the independent variable is also
open to question. Income as actually measured in expenditure
surveys, even annual income, is a poor proxy for "permanent" or
lifetime average income. Those such as the retired who have
current income less than permanent income (since they can consume
by running down assets) might be expected to spend a relatively
high proportion of their measured income on necessities, at a
given real living standard. Those whose current incomes are
higher than their permanent income will seem to spend relatively
low proportions on necessities. This makes the proportional
method particularly unsuitable for comparisons between groups
whose actual and permanent incomes are not roughly coincident.
In summary, the proportional approach is ad hoc and lacks a
strong theoretical base. Its main advantage is that, compared to
earlier budget or poverty research, it is based on the analysis
of households' actual expenditures rather than some perhaps
arbitrary specification of their needs. The choice of the basket
of necessities, however, is not necessarily any less arbitrary
and would appear inherently to introduce biases into the
results. In addition, the Australian research using these
methods has been able to produce only broad rather than detailed
indicators of relative family needs.
Further research on this approach may be of interest in one
regard. It is more resonable to assume that households of the
same composition and roughly the same income level should on
average be able to achieve the same standard of living. An
investigation of the factors associated with different levels of
spending on food or necessities when these circumstances are
similar might therefore throw some light on the budgeting
problems of low income groups and also on the permanent income
hypothesis.
53
The most important point to note about the Engel model is that it
is simply a method of analysing the available survey data. It
does not provide a theory relating the scales to consumer
behaviour. In effect, it is assumed that households of different
54
composition are able to achieve equivalent standards of living

(with the variation of income levels meaning that these
equivalent standards fall along a continuum from poverty to
wealth). That is, it is simply assumed that equivalence scales
exist and can be estimated from household expenditure survey data
using regression techniques.(12) In addition, it should be
noted that equation (3.3.2) is in fact the basis of the
proportional approach discussed previously.(13) As was shown,
its weakness is that a variation in family composition is treated
as having the same effect on the consumption of each commodity.
Sydenstricker and King (1921) first pointed out that different
household members should have differing effects on the
consumption of each commodity, and that each commodity should
therefore have a different commodity-specific equivalence scale.
That is, a child might be equivalent to 40 per cent of an adult
in the consumption of food, 30 per cent in the consumption of
clothing, 10 per cent in housing and transports costs and so on.
Therefore, instead of assuming that a child represents 40 per
cent of the costs of an adult on the basis of food expenditure
alone (as is the case with the proportional approach), this
method takes account of all expenditure items and weights the
scales according to the proportion that different commodities
make up of a child's costs. Sydenstricker and King's exposition
of this argument was in verbal rather than mathematical terms -
for example, they described a "fammain" as the required "food for
adult male maintenance", a "cammain" as the "clothing for adult
male maintenance" and so on, with the number of fammains in a
household being the number of equivalent unit-consumers on the
specific scale for food. Perhaps because of the obscurity of
their terminology, their insight was not exploited until it was
proposed again by Friedman (1952) and rediscovered independently
by Prais and Houthakker (1955).
3.4 The Prais-Houthakker method

The essence of the Prais-Houthakker method has been outlined
above, and can be expressed in mathematical terms as follows.
X
ij/Mij =
F(Yj/Moj) (3.4.1)
(12) While the original discussion of this approach was

atheoretic it has since been shown that the method can be
interpreted in the context of utility theory. See Deaton
and Muellbauer, 1980.
(13) While Engel could have estimated equivalence scales from the
data available, he preferred to base scales on studies of
physiological "needs". See Muellbauer, 1980, pp. 153-154.
55
where xij is expenditure on the ith good by the jth family, mij
is the effect on expenditure on commodity i of the composition of
the jth type of family, yj is the income of the jth type of
family and moj is the overall effect on consumption of all
commodities or the composition of the jth type of family. Thus,
this equation is the same as that shown by (3.3.2), except that
it allows for the differential effect of household composition on
consumption of different types of commodity. The mijS are the
commodity specific equivalence scales and the moj is the overall
household income equivalence scale, in which we are interested.
This method assumes that for each type of family it is possible
to determine the relationship between income and consumption of
each commodity that goes to make up total expenditures. It is
assumed that these expenditures on all commodity groups must add
up to total family income; that is, an income change will always
be absorbed by additional expenditures on all commodities.
Commodities are generally treated as fairly broad aggregates such
as food or clothing rather than specific items such as butter or
men's shirts (although there is no inherent reason why a more
detailed analysis could not be carried out). From equation
(3.4.1) it is possible to derive the relationship between the
specific commodity scales and the overall income scale. In fact,
the income scale is the weighted average of the specific
commodity scales, with the weights being approximately
proportional to the proportions of expenditures on the
commodities. Using the commodity scales and the income scale,
Prais and Houthakker could express actual household income and
expenditure in terms of equivalent household income and
expenditure, and thus for each commodity fit all household types
to a single equivalent Engel curve.
This approach therefore gives rise "to systems of Engel curves

relating income to expenditures on different commodities. By
estimating the commodity scales and the equivalent budget shares,
the income equivalence scales - the goal of the exercise as far
as this paper is concerned - can be obtained.
3.5 Identification and other mathematical problems
The estimation of the Prais-Houthakker model involves a number of

important issues. The first problem is to specify the functional
form of the Engel curve. Both economic and statistical
considerations influence the choice of the formulation to be
adopted. Among the economic considerations desirable is that
consumption of commodities should not be negative, and that for
some goods there should be a satiation level above which more of
the commodity is not consumed, however high income rises. In the
first case, it is obviously difficult to interpret negative
consumption in any meaningful sense, while in the second case it
is clear that it would be implausible for consumption of soap,
say, to rise indefinitely with income. These sorts of conditions
impose constraints on the type of functional form that can be
used in estimating the parameters of the Engel curves. The
choice of functional forms also entails the shapes of the Engel
curves and consequently implies different hypotheses about the
56
marginal propensity to consume different commodities out of an
increment to income and the income elasticities for different
commodities (i.e. the proportional rate of change in the quantity
consumed of a commodity given a change in income). The condition
that the expenditures on all commodities should add to total
expenditure at all income levels has further implications for the
relationship between the Engel curves in the system. For
example, not all commodities can have a satiation level or there
would be an income level at which some proportion of income would
not be allocated to expenditures.
These constraints on the functional form of the Engel curves may

not always be consonant with statistical considerations. In
general, it is desirable that the parameters of the functional
form should be capable of satisfying tests of statistical
significance and that the methods of estimating the parameters
should be straightforward. At the time when Prais and Houthakker
were undertaking their analysis, computers were not at an
advanced stage of development and it was therefore preferable to
consider functions that were easily estimated. Bearing these
factors in mind, Prais and Houthakker experimented with a number
of different specifications of the functional forms of the Engel
curves - specifically with the double-log, log-inverse, semi-log,
linear and hyperbolic forms of the regression equation. Their
conclusion was that none of these forms was found to be uniformly
satisfactory. In particular, it was always possible to obtain a
better estimate than that given by a linear form, and the best
form varied according to different commodities.
Prais and Houthakker (1955, p.134) noted that there is a major

structural difficulty involved in their method of estimation.
This is known as the identification problem. Identifiability is
a statistical concept referring to the difficulty of
distinguishing among two or more explanations of the same
empirical phenomena. The essence of the problem is an inability
to discriminate between a range of structural parameter estimates
with the aid of the data alone - different samples drawn from the
same population will tend to yield different estimates. The
identification problem is analogous to being asked to determine
two numbers whose product is known to be twelve. To solve xy =
12, it is necessary either to have a further independent equation
expressing the relationship between x and y or to have additional
information on the possible values of x and y. Without such
information, the possible number of solutions is literally
infinite (that is, the solution is indeterminate).
The problem arises in this case because the complete set of

functions relating demand, income and household circumstances
imply a linear dependence, because of the Engel aggregation
restriction (i.e. expenditures on each commodity must add to
total expenditures). If there are n commodities, there are n
commodity scales to be estimated and n equivalent Engel curves
from which to estimate them. However, the imposition of Engel
aggregation implies that once n-1 of the curves are determined,
the nth one can be inferred, leaving n-1 curves from which to
estimate n parameters. The Engel aggregation restriction, it
should be noted, is necessary for the logical consistency of the
model.
57
In effect, the commodity-specific scales cannot be estimated
unless the income scales are known, but the determination of the
income scales in turn requires knowledge of the commodity scales.
Prais and Houthakker suggested that this circularity could be
escaped - "if a good guess can be made for the income scale it
should be possible to obtain satisfactory estimates of the
commodity scales" (1955, p.134). Once the commodity scales have
been so determined, it would be possible to derive an estimate of
the income scale as the weighted average of the commodity scales,
as shown before. Then the specific scales can be re-estimated
on the basis of the new value of the income scale, and this
step-by-step (or iterative) process can continue until the
estimates hopefully settle down and new iterations do not make a
significant difference to the estimated scales.
Prais and Houthakker were able to identify some of the commodity
scales on the apparent initial assumption that each type of
individual had the same unitary weight in the income scale and by
making some arbitrary assumptions about the income elasticity of
consumption. Since they did not then obtain estimates of all
the commodity scales, they could not pursue their iterative
process. However, they did prepare two estimates (varying
according to the functional form of the Engel curve) of the
specific scales for food. A very provisional set of equivalence
scales can be presented if it is assumed that the specific scale
of expenditure on food and the income scale are the same. The
results of this assumption using Prais and Houthakker's food
scales derived from two surveys of British households in 1937-39
are shown in Table 3.8.
Table 3.8 : 'Prais-Houthakker equivalence scales'
- Britain, 1937-39
Household Type Equivalence Scale
Single adult 0.53
Couple, no children 1.00
Couple, one child (0-1) 1.19
Couple, two children (0-1, 1-4) 1.46
(0-1, 1-4, 5-9) 1.77
(0-1, 1-4, 5-9, 10-13) 2.14
Value for male 14-17, add 0.43
Value for female 14-17, add 0.35
SOURCE: Prais and Houthakker, 1955, p.141. These scales are
derived from the specific food scales based on semi-
logarithmic Engel curves. Use of the other functional
form would not significantly change the results.
58
It should be emphasised that Prais and Houthakker did not adopt
this procedure of taking the food scale as being identical to the
income scale. These results are shown here because an Australian
study by Fodder (1971) did suggest that this was a way of
achieving identification and applied the modified Prais -
Houthakker methodology to data from the 1966-68 Macquarie
Survey of Consumer Finances. Thus the results in Table 3.8
provide a useful basis for comparison with Podder's estimates
shown in Table 3.9.
Table 3.9 : 'Prais-Houthakker equivalence scales' as
estimated by Podder - Australia, 1966-68

Australia Sydney Melbourne
Single adult 0.49 0.53 0.50
Couple, no children 1.00 1.00 1.00
Couple, one child 1.25 1.25 1.24
Couple, two children 1.48 1.52 1.48
Couple, three children 1.68 1.76 1.75
Couple, four children 1. 97 2.01 1. 97
Couple, five children 2.38 2.31 2.30
Couple, six children 2.73 2.74 2.73
SOURCE: Podder, 1971, p.185
The results shown in Tables 3.8 and 3.9 are very similar, the
major difference being that Podder did not present scales varying
by the age of children. Podder's finding that a single adult
requires only 49 per cent of the income of a married couple is
implausible. He suggests that this may be because the latter
family has to buy proportionately more food to entertain guests
(p.186). It may be, however, that the result reflects the
effects of age differences in the composition of these household
types - a greater proportion of single person households may be
retired.
In any case, it must be emphasised that Podder's methodology does
not provide a satisfactory solution to the identification
problem. While Podder claims to be using the Prais-Houthakker
methodology, in effect he only applied the proportional approach,
and the resultant scales must therefore be considered to be
biased upwards.
Since the Prais-Houthakker study there have been many other
attempts to apply their methodology. The identification problem
has continued to be the major stumbling block, and different
solutions have been proposed by different researchers. Forsyth
(1960) concluded that scales could not be estimated from
cross-sectional data on expenditures alone. The issue has also
been discussed by Barten (1964) and Cramer (1969) and by Singh
and Nagar (1973), who suggested an alternative iterative
procedure which was later adapted by McClements (1977).
McClements analysed data from the 1971 and 1972 Family
Expenditure Surveys and produced the very detailed results shown
59
in Table 3.10. The most notable feature of these scales is the
extent to which the costs of children increase with age - from 9
per cent of the costs of a married couple for a child under 1
year of age to 36 per cent for a 16 to 18 year old.
Table 3.10 : McClements equivalence scales - United

Kingdom, 1971-72
A.
Household type All Households Retirement
Pensioners
Male Female Male Female
Single Person 0.57 0.53 0.57 0.62

Sole Parent, one child (0.62) -
Sole Parent, two children (0.80) -
Sole Parent, three children (1.01)
Sole Parent, four children (1.24) —-
Couple, one child 1.09
Couple, two children 1.27 —-
Couple, three children 1.48 -
Couple, four children 1. 71
—
B. Equivalence scales by age of child and age of household

head
Couple = 1.00 Couple aged 65 or over = 1.00
0-1 years 0.09 Head less than 30 years 0. 99

2-4 years 0.18 Head 30 to 49 years 1.00
5-7 years 0.21 Head 50 to 64 years 1.02
8-10 years 0.23
11-12 years 0.25
13-15 years 0.27
16-18 years 0.36
SOURCE: McClements, 1978, pp.102-111
Jensen (1978) in a useful and very clear review of methods for

deriving equivalence scales develops a general computational
formula for an equivalence scale incorporating information on
the number of adults and the number and ages of children in a
household, i.e. most other equivalence scale research gives rise
to values which are consistent with this general formula.
Because of the lack of New Zealand data suitable for the
derivation of equivalence scales, Jensen applied this formula to
McClements' equivalence scales and came up with the results shown
in Table 3.11.
60
Table 3.11 : Provisional equivalences derived from the

Jensen equivalence f o r m u l a
Number of children
Number of no 1 2 3 4 5 6
Adults children child children children children children children
1 adult 0.60 0.92 1.20 1.16 1.70 1.94 2. 16

2 adults 1.00 1.27 1.53 1.77 2.00 2.22 2.43
3 adults 1.35 1.60 1.84 2.06 2.28 2.49 2.70
4 adults 1.67 1.90 2. 12 2.31 2.55 2.75 2.95
5 adults 1.96 2.19 2.10 2.61 2.81 3.01 3.20
SOURCE: Jensen, 1978, p.66
Jensen's results are not an independent estimate of equivalence

scales, but simply smooth and interpolate McClements' results.
Given the lack of New Zealand estimates of equivalence scales,
Jensen considered that these results provided a useful but
provisional estimate for policy purposes.
While both these sets of results are generally plausible,
McClements' estimation procedure has been the subject of
considerable controversy (Muellbauer, 1979, 1980; McClements,
1979; Bardsley and McRae, 1982). The debate has been rather
technical and at times heated, and has centred around the
identification problem. McClements (1975, 1977, 1979) has
essentially argued that his method did not impose the Engel
aggregation constraint, and while this is less than perfect from
a theoretical perspective, it means that non-identification
cannot be proven. On the basis of his experiments with and
without identifying restrictions he concluded that these
restrictions did not make much difference to the estimated
scales, and that therefore the problem of identification may be
less serious than earlier considered.
The crux of the criticisms made by Muellbauer and by Bardsley and
McRae is that the identifying restrictions used by McClements,
the Theil-Goldberger restrictions, dominate the estimation
process. Theil-Goldberger estimation takes account of prior
beliefs that the results lie in a certain region, for example,
that the commodity scales for children should be positive and
less than those for adults. This is done by specifying in
advance a plausible value for each scale and a region within
which one feels confident that the true value lies. They thus
involve mixing "reasonable", a priori ideas of what the results
should be with the actual sample data and then seeing if the
estimated scales converge after successive iterations.
Muellbauer (1979) appears almost to suggest that these prior
restrictions were chosen so that the equivalence scale estimates
for children would be very similar to the actual relative
allowances for children paid in Supplementary Benefits by the
U.K. Department of Health and Social Security (DHSS).
61
More generally, Bardsley and McRae (1982) applied the Me Clements

method to Australian data from the 1974-75 Household Expenditure
Survey. Their conclusion is as follows: "From the results
shown it is clear that even without the aggregation condition
being satisfied the Theil-Goldberger constraints are needed to
identify the system. It is also clear that appropriate
manipulation of the Theil-Goldberger centres and variances would
allow virtual control of the scales produced. We concluded that,
with our data, the McClements methodology did not provide an
objective basis for estimating equivalence scales" (1982, pp.120-
121) .
Muellbauer (1979, 1980) suggests an alternative technique to
achieve identification - this is to set the specific scales for
food from expert recommendations of nutritional requirements and
estimate the remaining commodity scales and the income scale
subject to this prior restriction. (14) The drawback of this
approach, as Muellbauer notes, is that people do not normally
purchase the cost-minimising bundle of essential nutrients.
In his 1979 article Muellbauer used calorific requirements from

a 1969 DHSS study and applied them to estimate two sets of
scales from published data from the Family Expenditure Surveys
for 1968-1973. The results were very different from McClements' -
assuming no economies of scale in food consumption, the costs of
a child under 5 range between 33 and 40 per cent of a couple and
a child over 5 required an allowance between 49 and 58 per cent,
or assuming substantial economies of scale, the costs for a child
still ranged between 30 and 36 per cent for a child under 5 and
46 and 55 per cent for a child over 5. (The costs increased over
a range of total expenditures for the adult couple.) In his 1980
article, Muellbauer analysed the same data in a number of
different ways. First he applied the method without prior
information and he found, contrary to what lack of identification
would lead one to expect, that the results did appear to
converge, but to implausible scales which implied that the costs
of a child were between only 1 and 3 per cent of the costs of two
adults (p.165). Muellbauer then re-estimated the scales using
McClements' estimates of the food scales and found that the costs
of a child under 5 ranged between 10 and 14 per cent, and of a
child over 5 years between 24 and 27 per cent. He also reported
his earlier estimates using nutritional food priors, giving
scales ranging between 30 and 36 per cent and 46 and 55 per cent
depending on age. Clearly, this general approach is capable of
producing widely different estimates of relative needs.
(14) It should be noted that this technique is different from

that used by Podder (and shown in Table 4.9), who assumed
that the food scales were the same as the income scales; in
contrast, Muellbauer, initially assumed the values of the
food scales, but then employed iterative techniques to
determine the income scales.
62
There are other methods of identifying scales from the Prais-

Houthakker method. Muellbauer (1980) notes that if demand for a
good first increases with total expenditure and then reaches
saturation at a level of total expenditure which is covered by
the sample (15), the scale for that good is identified at the
saturation level and therefore could be used as identifying
information. However, Muellbauer could not find a single good
from British budget data which satisfied this and other necessary
conditions. In addition, even if there were such a good it would
imply using the behaviour of relatively wealthy households who
reached the saturation level of expenditures to identify scales
mainly of relevance to low-income families.
A further alternative originally proposed by Rothbarth (1943) and

also put into practice by Nicholson (1949), A.M. Henderson (1949,
1950) and Garganas (1977) involves separating-out commodities
which are consumed only by adults and for which the commodity
scales for children could thus reasonably be expected to be zero,
e.g. adult clothing, alcohol or tobacco or "excess income"
(income left after expenditures on necessities). This approach
assumes that a given level of expenditure on these commodities by
a two-adult, childless household will be attained by a two-adult
household with children at a higher income level. The difference
between the two levels of income is taken as a measure of the
cost of children and used as a basis for estimating equivalence
scales. Table 3.12 provides details of some examples of this
approach.
Generally, these results are fairly similar and all imply

considerable economies of scale. It is notable, however, that
with the exception of Nicholson's 1976 scales (about which little
information is available), the results of this procedure do not
provide detailed scales, because it is generally only possible to
compare those with and without children, and not single adults to
couples. The major problem with this approach is that data
obtained from expenditure surveys are notoriously unreliable when
it comes to estimates of spending on alcohol and tobacco.
(15) See the discussion of saturation on page 55 above.

63
Table 3. 12: Various equivalence scales adapted from Prais-Houthakker model
Equivalence scale
2 3 4 5 6
N n Nicholson Cramer A.M.Henderson Rothbarth Ga rganas
Household Type t?5^f (i) (ii)
Single person - 0.64 - - _ - -
Couple, no children 1.00 1.00 1.00 1.00 1.00 1.00 1.00

Couple , one child 1.25 1.13 1.12 1.17 1.15 1.13 1.29
Couple , two children 1.40 1.25 - 1.25 1.20 1.21 1.52
Couple" , three children - 1.36 - - 1.33 1.64
Couple" , four children - 1.47 - - - - -
Three adults - 1.30 - - - - -
_
Four adults ^ 1.56 „ r~ •"»
^^
SOURCE: 1-3, Nicholson, 1976, pp. 10-11; 4, Henderson, 1950, p.274; 5, calculated from Rothbarth, 1943, p. 129; 6,
Garganas, 1977, p.106 - (i) calculated assuming first and second children are under 4 years of age, (ii)
calculated assuming all children are between 5 and 14 years.
64
Assessment of the Prais-Houthakker method

The foregoing discussion and examples should make it clear that
the Prais-Houthakker method has been extremely popular and has
apparently been successfully applied to estimate equivalence
scales. However, there are just as many problems apparent with
this approach as there are applications. First, it should be
noted that in its original form the Prais-Houthakker model was
no more than an analytic method to be applied to the available
data. Until Muellbauer (1974), the approach lacked a basis which
could link the equivalence scale results with any theory of
consumer behaviour or any theory of how standards of living can
be measured. Second, there is a further theoretical and
practical problem with the Prais-Houthakker model itself. The
approach, in both its naive and sophisticated form, relates the
consumption of a commodity to income or total expenditures alone,
and not to the demand for and prices of other commodities. The
possibility of substitution between goods - as one set becomes
more expensive or becomes cheaper - is not explicitly dealt with
in the model. But a change in family composition affects prices
both absolutely and relatively - "Having children makes ice
cream, milk and soft drink more expensive and makes whisky or
cigarettes relatively cheaper. In Gorman's (1976) words, 'a
penny bun costs threepence when you've a wife and a child"
(Deaton and Muellbauer, 1980, p. 197). The lack of substitution
in the Prais-Houthakker model is suggested by Muellbauer (1980)
to have a substantial impact on the equivalence scale results
and lead to estimates of the costs of children that are
implausibly high and actually increase with income.
The third issue is the identification problem. It is clear that
none of the estimating techniques proposed satisfactorily resolve
this problem. The Singh-Nagar (1973) procedure adapted by
McClements (1977) is dependent on the use of a priori judgements
which affect the results unduly. The Podder (1971) proposal
avoids the identification 'problem rather than solves it and
should therefore be considered an application of the proportional
approach. The method suggested by Rothbarth (1943) and applied,
inter alia, by Nicholson (1976) involves the use of expenditures
on commodities which are well-known to be under-reported. The
various proposals of Muellbauer (1980) all involve unrealistic
behavioural assumptions. The very fact that it is possible to
derive widely varying results depending on the identifying
restrictions used - that the costs of a child range from 9 per
cent to 40 or 50 per cent or even 80 per cent of the costs of a
couple (Deaton and Muellbauer, p. 203) - must raise doubts about
the objectivity of this approach. While the Prais-Houthakker
method has been popular, it can be concluded with some confidence
that it is not an appropriate way to derive equivalence scales.
3.6 Utility theory
An alternative can be derived from studies of consumer demand
using utility theory.
65
In the simplest version of utility theory a single person

household is considered to attempt to maximise utility, which is
obtained directly from the services of goods purchased in the
market place. In a single period framework, the individual is
subject to a budget constraint - income is equal to total
expenditure, which is the sum of the basket of goods purchased at
their respective prices. The behaviour of the household is
analysed in an equilibrium framework. The main implication of
this is that the quantity demanded of each good is negatively
related to its price - if the price of a good goes up, demand for
it goes down, or if the price goes down, demand goes up. A rise
in income will increase the demand for most goods because the
additional income must be spent, where 'spent' includes adding to
cash balances or other assets. Variations in demand which are
not related to changes in real 'income and relative prices are
attributed to changes to the individual's tastes. Together,
these three factors - income, prices and tastes - are taken to
fully explain consumption behaviour. On this basis it is
possible to make predictions about the relationship between
prices, income and consumption, and to draw inferences about the
household's standard of living.
In this theory, the problem for the household is that of choosing

levels of consumption of goods and services so as to maximise a
utility function subject to a given budget constraint. In the
simplest case of two goods, in which quantities purchased by a
single household are measured by q 1 and q2 respectively, the
problem for the household can be stated as
Maximise U(q 1 ,q 2 ) subject to p1q1 + p2q2= Y ...(3.6.1)

where U(q1, q2) is the utility function, p1 and p2 are the prices
of the two goods and Y is the level of income of the household.
This problem (and its solution) can be depicted in Figure 3.1.
Figure 3.1 shows that a household can choose between quantities
(q1 and q2) of goods 1 and 2. The utility function is an ordinal
representation of tastes in that the household prefers a bundle
of goods Q = (ql, q2) with a higher value of utility to a bundle
with a lower value of utility. The budget constraint requires
that total expenditures, the sum of expenditures on each of the
individual goods, equal income. The household thus chooses among
the bundles of q1 and q2 that satisfy the budget constraint so
as to attain the highest available level of utility.
The budget line Y/p1 - Y/p2 indicates alternative possible

bundles of goods that can be purchased at the given prices and
income. The curves A,B and C are indifference curves which
indicate those bundles that have the same level of utility and
therefore between which the consumer is indifferent. The further
the curve is from the origin, the greater the level of utility
that can be obtained. But given its budget constraint, the
household maximises its utility at point X, where the budget line
is tangential to indifference curve B. Given these smooth and
smoothly varying indifference curves, at point X the slope of the
66
Figure 3.1 : Equilibrium of the consumer

67
budget line, which is the (negative) ratio of prices, equals the

slope of the indifference curve, which is called the (negative)
marginal rate of substitution. The optimal quantities of each
good demanded are q1 and q2 •
The demand functions give the the dependence of these optimal

quantities demanded on all parameters of equation (3.6.1), namely
both prices and income
91 = 91 (P1, P2, Y) )
) or qj = q j (p 1 , P2 Y), j = l,2..(3 . 6. 2 )
q2 q2 (P1, P2, Y) )
These functions indicate the amount demanded of each of the goods
at alternative combinations of prices and income. Holding the
price of the second good and income constant gives the demand
curve for the first good
91 = g(Pl) = q1 (P1,p2, Y) ...(3.6.3)

where the bars indicate that p2 and Y are held constant.
Similarly, the demand curve for the second good is
92 = 9 (P2) = 92 (P1 p2, Y) ....(3.6.4)

These (Marshallian) demand curves indicate the effect of a change
in the price of a good on the quantity demanded, holding the
other price (or prices where there are more than two goods) and
income constant. If the other price(s) or income change, the
result will be a shift in the demand curve.
It is also possible to hold the prices p1 and P2 constant to

yield the Engel curves.
=
P1 92 El(Y) = P1, 91 (P1 P2, Y) ....(3.6.5)
p2 q2 = E2(Y) = p2, q2 (P1, p2, Y) .... (3.6.6)
The Engel curves, which we have met before, indicate the effect
of a change in income on the expenditure on each good at fixed
prices. In econometric studies of consumer behaviour, the major
interest is in the elasticities of demand, which can be defined
using the demand function, the demand curve, or the Engel curve.
The own price elasticity of demand for a good can be defined as
the percentage change in the quantity demanded given a 1 per cent
change in the price of this good; the income elasticity of demand
for a good can be defined as the percentage change in the
quantity demanded given a 1 per cent change in income; and, the
cross price elasticities of demand can be defined as the effect
of a change in the price of one good on the demand for the other
good(s). These elasticities are therefore convenient summaries
of the responsiveness of the quantity of a good demanded to the
factors influencing it.
68
On the basis of the simple and intuitively appealing behavioural

assumption that households seek to maximise their satisfaction
subject to limited resources, it is therefore possible to derive
the relationship between income, prices and expenditures. The
problem of maximising utility, however, has a "dual", that is the
problem of minimising the cost of reaching that level of utility.
This can be stated as
Minimise Y = p1 q1 + P2 q2 subject to u = (q1, q2) .(3.6.7)
Utility maximisation and cost minimisation must imply the same

choice of goods, given constant prices. The solution to this
minimisation problem yields (Hicksian) demand functions, in which
the quantity demanded is defined as a function of price and the
utility level
<q1= q1 (pl P2, u

) )
) or q j = q j ( p 1 , p 2 , U ) , j = 1,2 .(3.6.8)
u
q2 = q2 (Pl , P2, ) )
These cost-minimising demand functions (of the general form
q = h (U,p)) show how the quantities demanded are affected by
prices, with utility held constant, and are hence known as
compensated demand functions. Solving the cost minimisation
problem also gives rise to the cost function Y = C(u,p), which
can be defined as the minimum cost of attaining a utility level u
at prices p. The cost function is of immediate relevance to the
derivation of equivalence scales, since as suggested in
appraising the Prais-Houthakker method, a change in family
composition can be thought of as analogous to a change in the
prices of different goods (ie. a quasi-price change). (16)
(16) This idea was put most clearly by Brown in commenting on

Barten's (1964) p a p e r : " a few years ago. I realized
in a moment of truth that when I was out with my wife and
three children and I wanted some lemonade it was in effect
costing me four shillings a bottle instead of one shilling
a bottle. (My wife doesn't drink lemonade.) At the same
time I also had the more pleasing feeling that beer was
still only costing me 1s. 6d. a pint. (My wife doesn't
drink beer either.). So I realized that it was rational
for me in these circumstances to switch my consumption in
favour of beer and away from lemonade. ... the point I
would like to make is that if one thinks of an indifference
map for some basic type of household with beer on one axis
and lemonade on the other, and if one draws a price line on
it, a change in family composition is equivalent to drawing
another price line below the first one, having a different
slope. Thus from the consumer's point of view, not only
have all relative prices changed, but he has also suffered
a loss of real income" (in Barten, 1964, p. 294).
69
3.7 The Barten Method
Barten (1964) used utility theory as outlined above as the

starting point for his method. As discussed, once the equilibrium
conditions are found, the effect of altering prices, incomes and
other factors can be calculated. Conversely, by holding utility
constant across households, it is possible to solve the
corresponding cost-minimisation problem. The ratios of the costs
to different households of meeting a given utility level are the
equivalence ratios.
Muellbauer (1974, 1977) developed the approach further and showed

that 'true household equivalence scales' are analogous to true
cost of living indices, which permit welfare comparisons across
households. These developments are held (e.g.Isherwood, 1978,
para 16) to make possible an unambiguous definition of an
equivalence scale, as the ratio of two cost of living measures
for different households.
A real income index is the ratio of two utility levels measured

at constant prices
C(u1, p) / C (u°, p) ... (3.7.1)

whereas, a constant utility cost of living index prices a given
utility level at prices p1 and p°
C(u,p1) / C (u, p°) ... (3.7.2)
If a third parameter (a) is implicitly introduced into the cost
function to allow for household composition effects, so that it
becomes c(u,p,a), then an equivalence scale may be defined as
C (u^a1) / C (u,p,a°) (3.7.3)
where a1 is the household composition of household 1, and a° is

the composition of the reference household.
Muellbauer (1974) showed that the earlier Engel and

Prais-Houthakker models could also be given a utility
interpretation in this way.
In the Barten model, both the form of the cost function and the
nature of the household composition parameter has to be made
specific-in any empirical estimation of equivalence scales.
There have been a number of estimations of the Barten model.
These have retained the demand analysis approach and have adopted
different cost functions.(17)
(17) For a tabular survey of the forms of the demand relations

and utility and cost functions of different equivalence
scale models, see Muellbauer, 1977, p.463.
70
The main implication of the cost function used in Muellbauer's

(1977) estimation of the Barten model is that household
expenditures can be considered as being allocated to a
"necessity" and a "luxury" composite good. Another important
feature of the model is that Barten incorporates all other
prices, as well as income, into the demand functions and thus
permits substitution between commodities. Allowing
substitutability is important, because it indicates that a change
in family composition can have a direct effect on demand (eg. a
child needs milk, clothes, toys etc) and an indirect effect,
because these goods become relatively more expensive for the
household. The choice of cost function affects the
interpretation and effectiveness of the model. It should also be
noted that the Barten model, like the Prais-Houthakker method,
suffers from the problem of lack of identification. Muellbauer
was able to identify the Barten system, however, by pooling cross-
sectional and time series data. Muellbauer's results are
outlined in Tables 3.13 and 3.14.
71
Table 3. 13: General equivalence scales using the Barten model -

United Kingdom, 1975
Household Type
Weekly Expenditure Couple, Couple, Couple, Couple,
Level for reference no children one child two children three children
household
20 pounds 1.00 1.15 1.30 1.44
30 pounds 1.00 1.15 1.29 1.42
40 pounds 1.00 1.14 1.28 1.41
50 pounds 1.00 1.14 1.27 1.40
70 pounds 1.00 1.14 1.26 1.38
100 pounds 1.00 1.13 1.26 1.36
SOURCE: Muellbauer, 1977, p.471
Table 3.14: Equivalence scales with age differences using the Barten model -
United Kingdom, 1975
Household Type
Weekly Expenditure Couple, Couple, Couple, Couple, Couple, Couple,
Level for reference no one one two two two
household children child child children children children
(age 0-4) (age 5-16) (0-4,5-16) (both aged (both aged
0-4) 5-16)
20 pounds 1.00 1.16 1.30 1.42 1.27 1.57
30 pounds 1.00 1.12 1.25 1.34 1.19 1.48
40 pounds 1.00 1.09 1.22 1.28 1.13 1.42
50 pounds 1.00 1.07 1.20 1.24 1.09 1.37
70 pounds 1.00 1.04 1.17 1.17 1.02 1.31
100 pounds 1.00 1.00 1.13 1.11 0.96 1.24
SOURCE: Muellbauer, 1977, p. 480

72
Muellbauer considered that these scales were low compared to

others. The results were improved when the ages of children were
taken into account, but still declined at what seems an
implausible rate for higher levels of income. Muellbauer's
statistical tests seemed to bear out a negative view of the
plausibility of the estimated scale values. His results suggest
that instead of merely correcting for the lack of
substitutability in the Prais-Houthakker model, the Barten
approach introduces excessive quasi-price substitutability.
Gorman (1976) proposed an alternative cost function to deal with
the problem of excessive substitution. By adding a "fixed cost"
element to the Barten cost function, Gorman reduced the degree of
substitutability allowed for in the model. In effect, this
"fixed cost" element simply recognises that the presence of
children commits a family to some expenditures which cannot be
avoided. Isherwood (1978, para 44) shows that an estimation of
the Gorman model indicates that at low levels of expenditure a
couple with two children needs 10 per cent more income than a
couple with one child to attain the same standard of living,
rather than only 5 per cent, as indicated by the simple Barten
model.(18)
3.7 The extended linear expenditure system (ELES)
This method builds on the work of Barten (1964), as outlined
above, and incorporates the linear expenditure system (LES) of
demand equations of Stone (1954). The linear expenditure system
is simply a specific functional form of the system of demand
functions (see above) that express the expenditures on the
complete set of commodities. The LES model has often been used
in studies of consumer demand because it is one of the few
systems that satisfies all of the theoretical restrictions on
systems of demand equations, and because it can be derived from a
specific utility function (see Intriligator, pp. 212-215, 225-
227). Muellbauer (1974) pointed out that this method also
suffers from an identification problem. In this case, total
expenditure is used as a proxy for income; because total
expenditure is the sum of expenditures on all commodities, in any
system of equations considering expenditure on individual
commodities, one equation is redundant. Consequently, the system
is not identified.
(18) The only information available on the Gorman estimation

procedure was provided by Isherwood (1978). The reference
provided by Isherwood was to a 1977 mimeo by Muellbauer
which was not available in Australia. It should be noted
that the estimation of the Barten model gives results quoted
by Isherwood which are not consistent with the 1977
Muellbauer article as shown in Tables 3.13 and 3.14.
73
Lluch (1973) incorporated savings into the linear expenditure

system, although for a different purpose than the derivation of
equivalence scales. Kakwani (1977, 1980) adapted this method by
reformulating the maximisation problem as a dynamic one; that is,
by incorporating savings, the relationship between expenditure
and income explicity enters as an additional equation. This
allows the system to be identified.
In effect, because of the functional form of the demand curves,

the main assumption in the ELES model is that households buy a
minimum satisfactory amount of each commodity. What is left of
their income, that which can be spent freely, is taken as an
indicator of economic well-being. Van der Gaag and Smolensky
(1980, section 2) note that this minimum satisfactory level
(MinSat) of expenditures should not be conceived of as an
absolute poverty line. Because its estimated levels may change
systematically with income, and because they may be related to
prior consumption levels, they should be considered as relative
measures of standard of living, or relative poverty lines.
There is some disagreement in the literature that this is a valid
interpretation of the concept. Van der Gaag and Smolensky,
nevertheless, did put the MinSat level to this use. Their
results were implausible. They derived a MinSat poverty line for
the United States in 1960-61 that was 180 per cent of the
official Orshanksy poverty line, about 85 per cent of median
income, and implied that about 38 per cent of U.S. households
were in poverty.
The ABS (1981, paras 6.3.2 - 6.3.4) provide estimates of pre-
committed expenditure levels for selected groups for Australia in
1975-76 and Kakwani provided estimates for Australia in 1967.
The results are shown in Tables 3.15 and 3.16.
Table: 3.15: Pre-committed expenditure ($pw.) for selected
groups -Australia, 1975/76
Group III is the standard group
AGE OF HEAD
HOUSEHOLD TYPE Less than 35 35-65 65+

I Single - Not working - - 53 (33) 50 (91)
II Single - Working 127 (160) 62 (164) 68 (19)
III Couple - Head works 147 (59) 114 (199) 68 (21)

wife not working
IV Couple - Head not 133 (9) 117 (63) 87 (317)
working
V Couple - Both working 157 (280) 137 (151) 100 (4)
SOURCE: ABS, 1981, para 6 . 3 . 4 . Sample size in brackets
74
Table 3.16: Pre- committed expenditures ($p.a.) - Australia,

1967
1. Families with household head only $2,136
2. Head and spouse only $3,538

3. Head, spouse, and one child $4,277
4. Head, spouse, and two children $4,879
5. Head, spouse, and three children $5,245
6. Head, spouse, and four children $5,434
7. Head, spouse, and five children $5,850
8. Head, spouse, and six children $6,157
9. All other households $6,343
SOURCE: Kakwani, 1980, p. 361.
The ELES method has been used to derive equivalence scales by a

number of researchers - Kakwani (1977, 1980) and SWPS (1981) in
Australia and Van der Gaag and Smolensky (1980) and Lazear and
Michael (1980) in the United States.(19) Their results are shown
in Tables 3.17, 3.18, 3.19, 3.20 and 3.21. There are some
striking differences between the results of these different
estimations of the ELES model. The costs of children estimated
by SWPS are significantly lower than those estimated by the other
researchers - for a couple with three children, the additional
costs can be taken as 30, 40 or 50 per cent, while a single adult
varies from 60 per cent to 90 per cent of the costs of a couple
without children.
3.9 Appraisal of the Barten and ELES models
It would seem undeniable that the Barten model is the most
sophisticated approach yet developed for the derivation of
equivalence scales. In contrast with earlier economic research,
the duality approach allows equivalence scales to be defined
which have an explicit link with the concept of utility, and
therefore a simple interpretation in terms of a family's standard
of living. In addition, the scales are derived from an analysis
of households' actual behaviour, not from some perhaps
unrealistic specification of needs. The inherent biases that
have been shown in the results of the budgetary, proportional and
Prais-Houthakker approaches are generally avoided.
(19) Olsen (1983) uses the ELES model, specifically as applied by

Lazear and Michael (1'980), not for the purpose of deriving
equivalence scales, but in order to project estimates of the
costs of children born in 1980 for their parents forward to
the time when they are no longer dependent.
75
Table 3.1?: Equivalence scales using the ELES method - Australia, 1967
Household Type
Couple , Couple, Couple, Couple, Couple, Couple, Couple,
Single no one two three four five six
Income level adult children child children children children children children
Less than $4,880 0.60 1.00 1.21 1.38 1.48 1.54 1.59 1.64
$6,000 0.61 1.00 1.21 1.38 1.48 1.52 1.57 1.61
$8,000 0.61 1.00 1.21 1.37 1.47 1.51 1.55 1.57
$10,000 0.61 1.00 1.20 1.37 1.47 1.50 1.54 1.55
$12,000 0.61 1.00 1.20 1.37 1.47 1.50 1.53 1.54
$14,000 0.61 1.00 1.20 1.37 1.46 1.50 1.52 1.53
$16,000 0.61 1.00 1.20 1.37 1.46 1.49 1.52 1.52
SOURCE: Kakwani, 1980, p.363

76
Table 3.18: Basic equivalence scales using the ELES method -

Australia, 1974-75
Single adult 0.67

Sole parent, one child 0. 92
Sole parent, two children 1.07
Sole parent, three children 1.05
Couple, two children 1.20
Couple, three children 1.31
Couple, four children 1.33
Couple, five children 1.48
Three adults 1. 39
Four adults 1.77
SOURCE: SWPS, 1981, p.110

77
Table 3.19: Detailed equivalence scales using the ELES method -

Australia, 1974-75
A. Overall scales
Head Works
Wife
Wife not Head Not
Household Type Works * Wo rking * Working **
Single adult 0.71 0.59

Sole parent, one child - - 0.87
Sole parent, two children - - 0.86
Sole parent, three children - - 1.17
Couple, no children 1.09 1.00 1.00
Couple, one child 1.31 1.11 1.13
Couple, two children 1.46 1.17 1.20
Couple, three children 1.53 1.33 1.38
Couple, four children 1. 53 1.36 1.41
Couple, five children 1.75 1.53 1.61
B. Effect of age of householdI head
Head Works
Wife Works « Wife Not Working « Head Not Working*
Age of Head Age of Head Age of Head
Household Type under 35 35-65 Under 35 35-65 Over 65 35-65 Over 65
Couple , no children 1.35 1.08 1.32 1.00 0.75 0.91 0.66
Couple , one child 1.47 1.25 1.25 1.32 - -
Couple , two children 1.18 1.48 1.29 1.36 —
Couple , three — — —
children 1.44 1.54 1.38 1.51 - - -
* Base is taken as a couple with head working
* Base is taken as a couple with head not working
SOURCE: SWPS, 1981, pp. 112, 117.
Table 3.20: Lazear - Michael equivalence scales

U n i t e d States, 1960-61

Single male 0.94
Couple 1, 00
Couple, one child 1, 21
Couple, two children 1. 39
Couple, three children 1. 59
SOURCE: Lazear and Michael, 1980, p.102, panel B.

78
Table 3.21: Detailed equivalence scales using the ELES method

United States, 1960-61
A. Basic scales
Single Mult
male 0.90
female 0.74
Sole parent, one child 1.09
(Head aged 35-54)
Couple, one child o 1.24
Couple, three children 1.40
B. Effect of age of houshold head
Household Type
Single adult
male under 35 0. 96
female under 35 0.79
male 35-54 0. 90
female 35-54 0.74
male 55-64 0.66
female 55-64 0.50
male 65 plus 0.51
female 65 plus 0.34
Couple, no children
head under 35 1.06
head 35-54 1.00
head 55-64 0.76
head 65 plus 0.62
C. Effect of age of children
Couple Couple Couple Couple
under 35 35-54 55-64 65 -
No children 1.00 1.00 1.00 1.00
Child under 6 1.22 1.24 1.31 1.38
Child 6 - 1 1 1.31 1.32 1.42 1.50
Child 12 - 17 1.40 1.43 1.56 1.69
Child 18 plus 1.43 1.46 1.60 1.74
SOURCE: Van der Gaag and Smolensky, 1980, Table 3,
79
The utility formulation does pose specific problems. The theory

starts with assumptions about the behaviour of a single person
and is then applied to the behaviour of households. This
approach avoids altogether the question of decision-making within
the family unit. It also is not correct to say that this
approach does not involve normative judgements, since inter-
personal comparisons of utility are essential. Most importantly,
the method assumes that the addition of a child to a family does
not impart utility and does not change the family's preferences.
If children actually do impart satisfaction and are part of the
family's long term choices about their standard of living, then
the resultant equivalence scales could be biased and also should
not be used as the basis for welfare comparisons. Muellbauer
(1977), however, shows that this admittedly fundamental issue may
not be relevant if family spending decisions are treated as
conditional upon longer term decisions about family size. In
turn, this implies that equivalence scales should be considered
most relevant to (low income) families, whose relative needs at
any point in time are more likely to be influenced by immediate
constraints than by longer-term preferences.
Despite these general issues, the main problems with the Barten
model arise in its specific estimations. Muellbauer's (1977)
estimation showed that the original model gives implausibly low
scales for children, apparently because of excessive
substitution. The choice of a different cost function improves
the plausibility of the scales, but raises the question of the
dependence of the results on the choice of the cost function.
Overall, there have been very few estimations of the original
Barten proposal and the model can be regarded as still being
tested.
Given the greater number of recent applications of the ELES

model, the problems of this approach are more apparent. In this
model, the marginal propensities to consume are constrained to be
equal across all household types, so that the household
equivalence scales turn out to be simply the ratios of average
pre-committed expenditure for the different household types. The
scales thus derived are in effect "community average" scales.
Although it is possible to estimate scales for incomes in excess
of the average in each group (20), it is not possible to do this
for low-income households, since the utility interpretation turns
out to be inapplicable to incomes lower than the average pre-
committed expenditure in each group. This is clearly a serious
problem if we are interested in deriving equivalence scales for
pensioners, beneficiaries and other low income groups. The
problem is compounded because of the point made earlier that
equivalence scales should be considered to be most relevant to
low income groups and not to high income groups, given the
assumption that children do not provide utility to their
parents. Moreover, the fact that roughly 30 to 40 per cent of
Australian households in 1975-76 did not appear to sustain their
"pre-committed" expenditures must have serious implications for
the behavioural assumptions of the ELES model.
(20) See, for example, the Kakwani scales in Table 3.17.

80
There is another problem which even casts doubt on the

applicability to the community average scales derived from the
ELES method. This is the income measure. As noted earlier in
discussing the Canadian method, it is doubtful whether current
income as measured in household expenditure surveys is even a
useful approximation to permanent income, and whether the
inherent biases are uniform across households. It is important
to note that all the other approaches outlined previously simply
use total expenditure, not income, as the explanatory variable.
A further unsatisfactory feature is the fact that the ELES system

is made up of linear demand curves. This implies that as income
increases, households will continue to allocate a constant
proportion of their additional income to each of the commodity
items, e.g. as noted before, households will continue to allocate
income to soap or toothpaste as income rises. The realism of
this approach therefore depends on how the commodity items are
specified. It was this issue that led Muellbauer in his 1974
article to state that "perhaps because linear Engel curves have
not found much favour, no one has, as far as I know, considered
household composition in the context of the linear expenditure
system" (p.109). The situation has changed since 1974 with the
growing popularity of the ELES model. Deaton and Muellbauer
(1980b) have proposed a new system of consumer demand equations,
the Almost Ideal Demand System (AIDS), which satisfies the
theoretical constraints to the same extent as the ELES model and
does not involve parallel linear Engel curves.
The extender of the linear expenditure system, Lluch, was himself
cautious in discussing the advantages of his method:
the esthetic appeal and computational advantages associated
with ELES should not cover up the severe limitations of this
formulation. The theory of savings ... is based on
expectations which are held with certainty, perfect capital
markets, and perfect markets for second-hand durable goods
. on a priori grounds, none of these are satisfactory
. Lacking a more adequate treatment, ELES has to be
presented as a particular case of some interest, given the
role of LES in demand theory and of ideas on "permanent
income" in the literature on consumption functions (1973, pp
23-24).
In conclusion, although the ELES method appears theoretically
plausible, an examination of its practical application exposes
severe deficiencies. The estimated results show a great deal of
diversity. The model is based on a concept of income which
cannot be measured in practice. Moreover, it cannot provide
scales appropriate to low-income groups.
81
4. THE ATTITUDINAL APPROACH

4.1 The individual welfare function of income
It was noted on page 2 of this paper that the concept of standard
of living encompasses not only the level of a household's
consumption of goods and services, but also the household's own
judgements about its welfare, and as well the evaluative
judgements of the general community. To this point this paper
has reviewed a variety of methods for determining equivalent
standards of living from an analysis of households' material
consumption or market behaviour. An alternative, therefore, is
to assess the relative needs of different households on the basis
of their own direct judgements of their needs.
There are two slightly different ways of doing this. One

approach is to determine what a representative sample of
households considers to be a poverty line income or a "reasonable
but adequate" income level (see SWPS, 1981 pp. 50-53, 72-74).
Questions on this issue have been asked in Gallup polls in the
United States and by the Roy Morgan Research Centre in Australia
since 1947. These questions have generally been along the
following lines: "In your opinion, what is the smallest amount a
family of four - two parents and two children - need a week to
keep in health and live decently?" This particular type of
question has a number of weaknesses - specifically that many
persons are asked about the minimum income requirements of
another type of family, of whose problems they may have no direct
experience. In addition, no one has yet actually used these poll
questions to estimate equivalence scales or poverty lines.
The alternative consists of asking people what they consider a
minimal level of income for themselves. This approach has been
used a number of times by researchers in Holland and Belgium,
specifically in order to determine equivalence scales or poverty
lines (see Kapteyn and Van Praag, 1976; Goedhart et. al., 1977).
In this approach an "individual welfare function of income" has
been determined by asking the following question:
"In answering the following question it is advisable to start

with the underlined words. Try at any rate to fill in all
amounts asked for to the best of your judgement. Taking into
account my (our) present living circumstances, I would regard a
net weekly/monthly, yearly (encircle the period) family income
as:
excellent
good
amply sufficient if it were between and
sufficient if it were between and
barely sufficient if it were between and
insufficient if it were between and
very insufficient if it were between and
bad if it were between and
very bad if it were below "
(Goedhart et. al., 1977, p. 507)

82
The respondents' verbal evaluations (good, sufficient, bad, etc)

are transferred onto a numerical scale by identifying these
evaluations with equally distributed ranges between zero and one
e.g. "very bad" is zero to 0.10, "bad" is 0.10 to 0.20, "very
insufficient" is 0.20 to 0.30, and so on up to "excellent," being
0.90 to 1.00.
These evaluations can then be plotted against income. Van Praag
(1968, 1971), on whose work much of this approach is based,
developed the model such that an individual can be said to
evaluate a net income level approximately by a lognormal
distribution function. The mean and. the standard deviation of
the function are given a psychological rather than a statistical
meaning. These "welfare parameters" differ between individuals
and are taken respectively to provide measures of individuals'
"natural units of income" (i.e. the income required to reach a
certain evaluation level or level of contentment) and of their
"welfare sensitivity" (i.e. the width of the range of income over
which their personal evaluations vary between 0 and 1). The
"welfare sensitivity" of individuals appears unexplainable by
factors such as income, type of employment or family size.
While "welfare sensitivity" did appear to be influenced by the
individual's own history of income variability and by the
dispersion of incomes within his or her own social reference
group, these factors explained only a small part of the variance
of "welfare sensitivity", which was therefore generally excluded
from further analysis. The "natural unit of income", however,
could be successfully explained by variables such as actual net
income, family size, location, level of education etc, and
therefore became the focus of further analysis to determine
poverty lines and equivalence scales.
Two applications of this approach are reported on here. Goedhart

et.al. (1977) concentrated on the issue of determining poverty
lines for different sized families. They conducted a written
survey among a random sample of nearly 3,000 families in the
Netherlands in 1975. The questionnaire contained, among others,
the income evaluation question quoted above, questions on family
composition and net income level, and the following question:
"We would like to know which net family income would,
in your circumstances, be the absolute minimum for you.
That is to say, that you would not be able to make both ends
meet if you earned less.
In my (our) circumstances I consider the following net
family income the absolute minimum: per week/per
month, per year (encircle the period)." (p.510)
The answer to this question was referred to as the "respondent's
minimum income". Linking poverty to peoples' welfare evaluation,
it was then hypothesised that this "minimum income" was equal to
the "natural unit of income" plus some constant factor (which
could be negative if poverty was represented by a welfare
evaluation less than 0.5). Estimation of this relationship led
83
to the conclusion that the welfare level associated with a

respondent's minimum income was not independent of his actual
income. That is, as individuals' actual incomes rise, their
"minimum incomes" rise also, and at a faster rate than the
"natural unit of income" - "richer people are more demanding with
respect to their minimum income than are poor people not only in
money terms but also in welfare terms" (Goedhart et. al., 1977,
pp. 513-514).
The problem therefore, given that individuals' "minimum incomes"

vary with their income level, is to determine a single poverty
line for society as a whole. But the only situation in which a
respondent's appraisal of "minimum income" is unaffected by
actual income is the point at which the two coincide. That is,
the poverty line is the income level at which people say they can
just cope on their present income. The equivalence scales were
the relative levels of the derived poverty line for different
family types. Table 4.1 shows the results of this process.
Table 4.1: Estimated equivalence scales from the attitudinal

approach - Netherlands, 1975
Family Size Poverty Level Equivalence Scale at

Equivalence Higher Welfare
Scale Evaluation Levels
1 0.81 0.83
2 1.00 1.00
3 1.13 1.12
4 1.24 1.21
5 1. 32 1.28
6 1.40 1.35
7 1.47 1.41
SOURCE: Goedhart et. al., 1977, pp. 515, 517
The "minimum income" level set for each family has a

corresponding welfare evaluation level - in the case of the
estimated poverty line about 0.35, or somewhere between "very
insufficient" and "insufficient" on the scale referred to
previously. If it is considered socially desirable for the
poverty line to allow for a higher welfare evaluation level to be
achieved (say, barely sufficient), it is possible to adjust the
poverty income level accordingly. The results of doing this are
shown in the second column of Table 4.1. It will be seen that
this has relatively little effect on the estimated equivalence
scales. Notable features of both sets of scales are the high
relative allowance for single individuals, and the marked
economies of scale. The calculations by Goedhart et. al. also
show variations by family size only , and not by family
composition or age of members.
A further feature of these results is that the poverty incomes
calculated were significantly below the statutory provisions of
the Social Assistance Act in the Netherlands at the time. This
result is exceptional, among poverty research since it suggests
84
that on this measure there should have been no poverty in the

Netherlands in 1975. However, since the poverty income level had
to coincide with some families' actual incomes, there presumably
were a significant number of people with incomes below the
statutory minimums.
More detailed equivalence scales from this approach are provided

by Kapteyn and Van Praag (1976). They applied broadly the same
methodology to a sample of some 3,000 Dutch individuals in 1971,
and expanded the model to estimate the effects on a family's
"natural unit of income" of the age of adults and age and rank of
children, the education level of the head of the household,
whether they were living in an urban or rural area, and whether
both or one partner had a paid full-time job. Table 4.2 provides
details of some of these estimates.
Table 4.2: Detailed equivalence scales from the attitudinal

approach - Netherlands, 1971
A.
Equivalence scale Equivalence scale

Family Composition for young family* for older family*
Couple, one child 1.19 1.14
Couple, two children 1.28 1.21

Couple, three children 1.36 1.27
Couple, four children 1.39 1.30
B.
Age of adults Relative Allowance
Female Male
25 27 1.00
25 40 1.10
50 52 1.34
55 57 1.36
* A "young family" is one where the female is aged 25 years

and the male aged 27 years; in an "older family" the female
is aged 55 years and the male 57 years.
SOURCE: Kapteyn and Van Praag, 1976, p. 326
85
Kapteyn and Van Praag excluded "incomplete families" from their

sample for analysis, so it was not possible to estimate
equivalence scale values for single people or sole parent
families, nor, because of the exclusion of singles, was it
possible to calculate separately the relative needs of husbands
and wives. Like Goedhart et. al., Kapteyn and Van Praag found
considerable economies of scale - for a young family, the first
child added 19 per cent and the fourth child only 3 per cent.
The most distinctive and puzzling feature of these results is
that relative needs were found to vary significantly by the age
of adults but very little by the age of children. Table 4.2
shows that the relative allowance for a couple of 57 and 55 years
was 36 per cent higher than for a couple of 27 and 25 years. In
contrast, while the allowance for a first child in a young family
was six times that for a fourth child, the relative needs of a
constantly ranked child was the same whether 12 years of age or
20 years of age (pp.325-326). Kapteyn and Van Praag note that
"when the children grow up, the parents grow older as well and
pass through the sensitive age bracket between 24 and 48 years:
in that bracket the parents' requirements appear to grow
considerably while the children's needs measured as a percentage
of family income remain constant" (p.324)
This conclusion goes against the evidence of nearly all other

equivalence scale studies. Kapteyn and Van Praag acknowledged
this and experimented with different specifications of the age
function but found the same results. They then argued that
because other equivalence scale studies generally did not analyse
the effects of the age of adults, the conclusion of these studies
that costs of children varied significantly with age was
incorrect, the apparent age-costs of children simply reflecting
the real increases in adult costs. There are, however, very good
reasons for considering that the needs of children do rise with
age, while the reasons for judging that adult costs increase
significantly between 24 and 48 years are far less strong. For
example, children require significantly more expenditure on food,
clothing, schooling and recreation as they grow older and
larger. It is true that adult couples may spend more on housing
as they trade-up with age, or their expectations may increase as
their incomes generally increase with age, but it is more likely
that their expenditures increase because their spending on
children increases as the children grow. On practical grounds,
Kapteyn and Van Praag's conclusion seems indefensible, and
suggests either some mis-specification in their specific model or
more seriously some flaw in the method of deriving relativities
from personal welfare evaluations.
4.2 Appraisal of the attitudinal approach
The attitudinal approach has been developed only over the past
fifteen years, and, since the methodology has been outside the
mainstream of earlier research on either poverty or consumer
behaviour, it lacks a critical literature through which it would
be possible to assess more comprehensively its weaknesses and
strengths. Given the limitations of earlier methods of deriving
86
equivalence scales, the attractions of an alternative are clear.

The attitudinal scales are based on the analysis of an important
but hitherto neglected aspect of family living standards - the
household's own judgements about its welfare.
Goedhart et. al. in discussing their poverty lines point out

that all definitions of poverty involve judgements - either by
politicians or administrators, by experts in budgetary
management, by the general community, or by families about their
own situation (pp. 517-518). They argue that "the only value
judgement involved [in their approach] seems to be that people
themselves are best qualified to judge what their minimal
requirements are" (p.518). The Social Welfare Policy Secretariat
(1981) argues along similar lines that this is the major
advantage of this approach to the determination of poverty lines
at least. SWPS' specific arguments are first, that virtue should
be made out of necessity and it should be recognised that poverty
lines are nothing but judgements, and, second, since this method
is based on the judgements of the general population and not
experts, "it may be in keeping with the spirit of the times"
(p.50). What needs to be determined, therefore, is whether
people's judgements are good guides to their own standard of
living - whether evaluations of welfare are the same as welfare
itself.
The first point to be made is that it must be considered

questionable whether the "excellent", "good", "sufficient", "bad"
evaluations can be unambiguously translated into numerical values
that approximate levels of family welfare. This is the basis of
the approach, and yet it lacks a strong theoretical argument.
Second, personal welfare evaluations form only part of the
composite concept of living standards. Living standards are made
up not only of people's own evaluation of their situation, but
also of general community evaluations and the actual consumption
of goods and services. Previous equivalence scale literature has
concentrated on material consumption as being both more amenable
to measurement and more important in determining welfare. The
attitudinal literature does not dispute this argument. Indeed,
Kapteyn and Van Praag explicitly rank previous equivalence scale
research from a priori judgements and normative budgets to the
analysis of demand systems based on all expenditures, in terms of
the "increasing content of the underlying theories" (p.313). On
this criterion, the attitudinal scales are less attractive
because they are based on judgements about a smaller component of
family welfare than previous economic research. Goedhart et. al
present their methodology, therefore, as a complement rather
than a substitute for previous approaches (p. 517).
On the broader issue, there are good reasons for considering that
individuals' welfare evaluations are not necessarily good guides
to their needs. In his study of poverty in the United Kingdom,
Townsend (1979) sought information on subjective feelings of
deprivation as well as objective deprivation. This was not used
to derive the poverty standard, but to analyse whether people's
feelings of deprivation were consistent with objective measures.
While Townsend found that the majority of people did reflect in
their attitudes to their own living standards the resources which
87
they in fact had at their command, there was some significant

variability. Around 7 per cent of people whose net income was
less than half of the mean for their household type thought they
were better off than the average in the country, while 11 per
cent of those whose income was twice the mean thought they were
worse off (p.424). In answer to the question: "There's been a
lot of talk about poverty. Do you think there's such a thing as
real poverty today?", a higher percentage of those who were
objectively poor on the basis of their net income than of those
were not poor thought there was no real poverty (p.427). Among
the factors associated with this personal denial of poverty was
frequency of social contacts and stability of personal
circumstances, i.e. by comparison with others at the same low
income level these people were more likely to give hospitality
to relatives or friends, or were more likely to have lived at the
same address for fifteen years or more (p.426).
Townsend's findings point to two potential major problems with
the attitudinal approach to developing equivalence scales or
poverty lines. The first is the influence of the precise choice
of words in welfare evaluation questions. The Social Welfare
Policy Secretariat point out the questions can reflect the
researchers' own ideas about poverty - "By asking a question such
as 'what is the absolute minimum your family needs to live on?',
we would set a more austere poverty line than if the question had
been posed in terms of health and decency" (1981, p.52). There
are also problems with possible ambiguities in the way the
questions are framed. For example, Goedhart et. al. asked, in
part, : "We would like to know which net family income would, in
your circumstances, be the absolute minimum for you. That is to
say, that you would not be able to make both ends meet if
you earned less" (p.510, emphasis added). Income, of course, is
not the same as earnings. Persons with significant unearned
income, either from social security, savings or investments, may
interpret such a question differently from persons with only
earned income. Moreover, this question was asked in a mail
survey, where the possibility of varying interpretations is much
less easy to control.
The second problem arises from the possibility of a systematic

relationship between welfare evaluations and family type.
Because of their position in the life cycle, families with
children are more likely to have higher incomes than families
without children, single persons or sole parent families. The
welfare evaluations of sole parent families may be structured by
their income histories, which are more variable and at a lower
level than those of couples with children. There is a possible
bias because variations in the two main explanatory variables -
income and family type - may be systematically related to each
other.
There is a further problem with the attitudinal approach, a
problem which while specific to the practical application of the
model is of sufficient importance to cast doubts on all the
results to date. The income evaluation question was only asked
of the family head. As Goedhart et. al. put it, "we assume that
the family head's welfare function represents the family's
welfare function" (p.509n).
88
This in turn implies that the family head (usually the husband)
will make the same evaluation of a lower or higher income level
as all other members of the family. If someone other than the
head undertakes most of the household budgeting and purchases
most of the groceries and children's clothing, and pays most of
the recurring bills, then it is likely that the family head's
evaluation of income will be based on ignorance. It would seem
very likely that this is the case. This and the unequal sharing
of resources within the family unit must be regarded as a problem
for all equivalence scale research, but for the attitudinal
approach they appear far more significant. (See Edwards (1981)
and the discussion on page 99-100 of this paper).
In conclusion, it would appear that the limitations of the
attitudinal research discussed here outweigh its attractions.
While the equivalence scales shown in Table 4.1 and 4.2 are
generally reasonable, there are problems with the increasing
allowances for adults as they grow older and the flat
relativities for children as they age. The theoretical problems
are even more daunting.
89
5 CONCLUSION
5.1 Some complications
Equivalence scales can be powerful tools for investigating the

needs and economic circumstances of families, but their
limitations should be kept in mind when considering what such
scales actually measure.
The different approaches and the role of value judgements
An initial problem is that research into the derivation of
equivalence ratios has proceeded on the basis of different
assumptions about what constitutes a family's standard of
living. In the area of poverty research, equivalence scales were
initially little more than a by-product of the process of
determining what constituted an inadequate standard of living for
different types of families. The assumptions implicit in various
scales reflected historical developments in the debate about
poverty - the development from absolute to relative concepts of
poverty, and to ideas of relative deprivation? and the differing
underlying public perceptions of poverty that provided a basis
for poverty research and anti-poverty policies. As a
consequence, some equivalence scales that are even now widely
used can be said to be the by-products of definitions of an
inadequate standard of living that poverty researchers devised in
the United Kingdom in the 1930s, or in the United States in the
1950s and 1960s.
Apart from poverty research, the major contribution to the
derivation of equivalence scales has come from theories of
consumer behaviour in economics. Generally this has involved
studies of household demand for commodities. A major concern of
these studies has been to determine how the quantity of a
commodity consumed is changed by a change in income. In analysis
based on cross-sectional data, the presence of households of
differing composition can seriously affect estimates of these
changes, and it is therefore necessary to "standardise"
households. Equivalence scales are required for this purpose.
As a consequence, equivalence scales derived from these
techniques reflect the assumptions made about standard of living
in economic theory, and also reflect the increasing technical and
mathematical sophistication of that theory.
The literature on equivalence scales has therefore a very mixed
flavour. On the one hand, there are budget studies which contain
seemingly innumerable judgements about what quantity of noodles,
potatoes or beans a family can get by on each week, how many
pairs of shoes a child goes through or suits an adult requires in
a year, whether allowance should be made in family budgets for
the purchase of newspapers or beer, and whether persons should
get their hair cut professionally or in the home. On the other
hand, there is the literature that deals in terms of utility
functions, the Engel aggregation constraint, permanent income,
90
quasi-price substitutability and the identification problem.

Each tradition is somewhat unpalatable to those working from the
other background. In addition, economists (e.g. Fodder, 1971,
p.176) often distinguish their approach from that involved in
poverty research by arguing that the poverty literature
essentially involves normative judgements, while their methods
are objective.
In much of the literature derived from poverty research, the idea
of standard of living has not been systematically explored,
partly because that literature has been empirical in its bias.
The most important exception is Townsend's Poverty in the United
Kingdom (1979), in which he develops the theory of relative
deprivation in combination with a detailed survey of living
standards. The early economic literature was also rather
unsystematic in its approach to these issues.(21) More recent
economic writings have attempted to place the derivation of
equivalence scales on a sounder theoretical basis - in
particular, in the context of the utility theory.
In recent years there have been significant developments in the

theory of consumer behaviour, developments which have major
implications for equivalence scale analysis. But the attempt to
place the derivation of equivalence scales within the context of
even this simple theory raises major problems. For example, the
basic purpose of equivalence scales is to compare the welfare of
households, that is, in economic terms to compare their levels of
utility. Some economists reject the very possibility of validly
making interpersonal comparisons of utility - it may be
meaningful to compare the types and quantities of goods consumed
by different individuals, but is it possible to compare the
satisfactions derived from those goods? Equivalence scales can
only be meaningful if it is assumed that it is possible to make
such comparisons. That is, of their essence they involve
judgements about values.
(21) While many important studies, e.g. Prais and Houthakker

(1955), can be given an interpretation in terms of utility
theory, their models were not originally put forward in this
framework. Muellbauer (1974) and Deaton and Muellbauer
(1980) show how earlier approaches can be given a utility
interpretation.
91
Private choice and public support
Further, as Seneca and Taussig point out, a basic assumption of

conventional equivalence scale analysis is that the economic
well-being of families, at a given level of income, is a negative
function of family size (1971, p.255). This implies that
children are exclusively an economic burden to their parents.
This assumption is disputed by Pollak and Wales, for example, who
argue that the equivalence scales required for welfare
comparisons are logically distinct from those which arise in
demand analysis. They declare that the usual procedure of
deriving equivalence scales from observed differences in the
consumption patterns of households is illegitimate:
The expenditure level required to make a three-child family

as well off as it would be with two children and $12,000
depends on how the family feels about children. Observed
differences in the consumption patterns of two - and three -
child families cannot even tell us whether the third child
is regarded as a blessing or a curse. (1979, p. 216)
Pollak and Wales' argument is that in demand analysis family

composition can be taken as pre-determined - each family takes
its size and characteristics as fixed when choosing its pattern
of consumption. But welfare comparisons require a conceptual
framework in which preferences are defined for family size as
well as goods and services.
Pollak and Wales offer three alternative solutions. First, it
might be assumed that the direct contribution of children to
family welfare is constant across all households. This
assumption, however, causes problems in the estimation of
equivalence scales, one result being that large families appear
to need less than small families. Second, the contribution of
children to family welfare could be assessed through the direct
questions approach, and family equivalence ratios reweighted
according to the direct valuation given to children by different
types of families. The methodology for doing this is still being
developed, and in any case, as shown in Part 4, is of dubious
reliability. The third alternative, and one favoured by some
economists, is to argue that family size reveals the preferences
of the family, and it is these preferences that should be used in
welfare comparisons. According to Pollak and Wales:
Thus, in a perfect contraceptive society, if
a family chooses to have three children and
$12,000 when it could have had two children and
$12,000 then a revealed preference argument
implies that the family prefers the alternative
it chose. (1979, p. 219)
On this basis, it can be argued that no allowances at all need be
made for the costs of children in either the income tax or the
social security system.
92
Not surprisingly, this conclusion has been strongly criticised.

Cass, Keens and Wyndham (1983, p. 17) in a study of the direct
and indirect costs of child-rearing, point out that the social
policy implications of this approach are that parents, who derive
personal benefit from their children, should also bear the costs
of their own private consumption preferences. They identify an
alternative perspective which views children as a social
investment and national resource, thereby providing justification
for public expenditure on their care and development.
But in fact, Pollak and Wales are correct in their arguments

regarding conventional equivalence scales. The issue they raise
is fundamental. Such scales can measure only part of the utility
or pleasure derived from children. What is arguable is whether
the satisfaction derived from children is relevant to social
policies for children.
The major problem with the revealed preferences argument is the
assumption that children are purely objects of choice. Many
children are unplanned, and not only in relation to timing.
Children are irreversible. Before deciding to have children,
people may make judgements about their incomes and
opportunities for periods of up to twenty years ahead. There is
considerable uncertainty involved in these judgements and
parents' information may be faulty. Economic conditions can
change, particularly for persons who become unemployed or become
sole parents or invalids. The incomes of the poor are typically
subject to fluctuations. Indeed, poverty can be defined as a
condition of constraint on choices - the assumption of free
choice is therefore simply inappropriate. Finally, as Muellbauer
notes, "very fundamentally, children are individuals too. This
means that the real consumption levels of children should
themselves be part of the measurement of the overall distribution
of income, irrespective of whether they are a positive part of
their parent's standard of living" (in Diamond, 1978, pp. 337 -
338).
It would therefore seem reasonable for social security purposes
to ignore the satisfactions derived from dependent children. In
considering taxation policies, however, the position is not so
clear. It can be argued that children impose unavoidable costs
on families at all income levels and therefore require public
support. Alternatively, it may be considered that at high income
levels children are more likely to be objects of choice and be
less deserving of public support. Interestingly, the arguments
of advocates of either position seem to switch around when it
comes to the tax treatment of dependent spouses. In Australia at
least, those in favour of universal assistance for dependent
children generally advocate a more restrictive approach to the
public support of dependent spouses, on the basis that the
decision of women (usually) not to work in the market place is a
private choice undeserving of public support. Again, advocates
of restricting assistance to children through the family
allowance system generally take a more liberal view of assistance
for spouses through the taxation system. The issue is further
complicated because it is possible also to argue for the support
of dependent spouses as a social investment, in arguments
precisely analogous to those used for children.
93
The crucial issue once again is the degree of constraint imposed

on whatever choices are involved with having dependent children
or dependent spouses. The two choices are of course
inter-related - generally the dependency of spouses accompanies
the birth of children. This might seem to suggest that public
support for dependent spouses through the taxation system should
be limited to those with dependent children. However, this
conclusion should be qualified, since a large proportion of
dependent spouses without children are likely to be older women
whose lack of work experience and labour market disadvantages are
a direct result of the former presence of children. In addition,
when considering public policies for dependent and working
spouses, account needs to be taken of factors such as the costs
of child care, the costs of working, and the contribution of all
family members to their joint standard of living. How these
factors balance out is not at all clear. In summary, it is
unrealistic to treat all children or dependent spouses purely as
an economic burden, but it is also unrealistic to treat either
purely as if they were objects of choice without effective
costs.
Gross and net costs
A related issue that further complicates the analysis of what

equivalence scales actually measure is the different
interpretations that can be given to the concepts of "the cost of
a child" or "the economies of married life". A.M. Henderson
(1950) suggests two possible ways of measuring the cost of a
child. First, if a family has an annual income of $5,000, say,
to spend before having a child, by how much must the family
income rise to cover the costs of the child and leave the parents
as much to spend on themselves? The figure derived to answer
this question is termed "the compensating variation". This
variation can be thought of as the direct costs of child-rearing,
which are defined by Cass, Keens and Wyndham (1983, p. 17) as the
direct expenditures by parents on children's requirements for
food, clothing, education, transport, health care, leisure and
the extra costs incurred for accommodation, heating and household
equipment.
The second measure, which A.M. Henderson terms "the equivalent

variation", shows the net effect of a child upon a family's
pattern of consumption. This is what most conventional
equivalence scales measure. It differs from the first because
children have an indirect, as well as a direct effect upon their
parents' spending patterns. For example, adult spending on
alcohol, tobacco and entertainment may change on the birth of a
child, not only because adults have less money to spend, but also
because their preferences change. Children or child-related
activities are a substitute for some previous adult activities.
The same sort of shift of preferences and shift of patterns of
expenditure could be expected to occur on marriage. While these
shifts of expenditure may not be very large for individual items
such as tobacco, in aggregate they appear to be more
significant.
94
Conventional equivalence scales therefore do take some account of

the utility derived from children, if not to the extent that
Pollak and Wales suggest. It is also significant that the
equivalence scale measure of the net cost of a child will always
be less than the compensating variation, or gross cost. The
equivalent variation is the appropriate measure when analysing
income distribution statistics, but there is a strong argument
for using the compensating variation when assessing the adequacy
of social security payments. As noted previously, poverty can be
defined as a condition of constraint on choices - to give poor
parents the equivalent variation rather than the compensating
variation on the birth of a child may be considered to strengthen
those constraints.
Economies of scale
The concept of "economies of scale" can be distinguished from
that of the "economies of married life", as discussed
previously. The term "economies of scale" refers to the effects
of joint consumption of some goods and services. For example,
the addition of a child involves extra food consumption if the
previous standard of living of a household is to be maintained,
but due to sharing of housing services, little extra spending on
housing is required. Joint consumption occurs where two or more
individuals in a household can share a good or service without
reducing the satisfaction derived by any one person. Joint
consumption arises because units of a good or service may be
indivisible. It is not possible to have half a kitchen, half a
television set or half a refrigerator. Because these items come
in single units, consumption cannot be attributed entirely to one
individual or another. If one person left the household,
consumption of indivisibles would remain unchanged. (22) At the
other end of the sharing range, there are goods like food and
clothing which are divisible and may be able to be ascribed to
individuals. But even here there may be an element of joint
consumption; for example, in the cooking and preparation of food,
costs may not increase in the same proportion as the costs of
food items themselves. In practice most goods will fall betwen
the two extremes of pure joint consumption and entirely
independent consumption. Most goods will be partly but not
entirely attributable to individuals.
The new theory of consumer behaviour
From these examples it is apparent that economic analysis has
concentrated on the material aspects of a family's standard of
living. The simple version of utility theory outlined previously
ignores conflict and co-operation within households, essentially
treating each household as if it had only one member, and
focussing on the effects of changes in money income and money
prices on the allocation of income among market goods. A major
problem with this approach is that to the extent that income and
prices do not explain consumption behaviour, the explanation must
rest with changes in taste. For example, if a household derives
utility from heating fuel then, in the simple theory, its tastes
(22) See McClements, 1978, pp. 99-101.

95
must change seasonally to explain why it purchases more fuel in

winter, when the price of fuel is usually higher. Similarly,
people must experience a shift in preferences towards medical
care and away from sporting equipment as they age, since the
market prices of these items are not related to age and yet
expenditure patterns appear to change with age.
Clearly, it is possible to interpret these facts in a plausible

way, but "for economists to rest a large part of their theory of
choice on differences in tastes is disturbing since they
admittedly have no useful theory of the formation of tastes, nor
can they rely on a well-developed theory of tastes from any other
discipline in the social sciences, since none exists" (Michael
and Becker, in Becker, 1976 p. 133). In addition, the simple
theory of utility as outlined does not take account of many of
the most important factors in a family's standard of living; for
example, the allocation of time between work and leisure by
different family members, or the presence of children.
The "new theory of consumer behaviour", associated to a large
extent with the writings of Gary Becker (1976, 1981), does take
account of some of these issues. This approach views as the
primary objects of consumer choice, commodities, which are
produced by the consumer unit itself through the productive
activity of combining purchased market goods and services with
the household's own time. In this framework all market goods are
inputs used in the production processes of the non-market sector.
In effect, each family is treated as a kind of little 'factory',
a multi-person unit producing meals, health, skills, children,
and self-esteem from market goods and the time, skills and
knowledge of its members.
In A Treatise on the Family (1981), for example, Becker uses this
approach to analyse the division of labour in households,
polygamy and monogamy, assortative mating, the "demand for
children", family background and opportunities, inequality and
intergenerational mobility, altruism, the history of the family
in traditional and modern societies, and even the behaviour of
families in non-human species. It is for such ingenuity that
Becker has been described as the "Kipling of the economic
empire" (McCloskey, 1983, p. 53).
Not surprisingly, some of the colonised regions have expressed
doubts about the value of the intrusion of the economic mode of
analysis into the area of sociology, law, history, politics and
demography. Liebenstein, for example, has noted that "to some of
those who had been labouring in the vineyards of demography for
decades, the efforts of economists in the sixties and seventies
to develop a theory of fertility may have appeared like the
invasion of a horde of primitives on a technologically advanced
community proclaiming loudly their intent to reinvent the wheel"
(in Jenni Newton, 1981, p. 34).
Some economists too have questioned the usefulness of all aspects
of these developments. The new approach has greatly expanded the
scope, comprehensiveness and realism of the theory of consumer
behaviour, but there is a considerable degree of abstraction
remaining in some of the concepts. For example, one of Becker's
96
most famous metaphors is that of children as durable goods (in

Becker, 1976, pp 172-173). As McCloskey points out this can be
translated as follows: "A child is costly to acquire initially,
lasts for a long time, gives flows of pleasure during that time,
is expensive to maintain and repair, has an imperfect second-hand
market .... Likewise, a durable good, such as a refrigerator...."
(1983, p. 503). The main behavioural assumption of this approach
is that children are planned - that parents make long-term
decisions about their housing, their life style and its material
components, the way they spend their time, and the number of
children they want to have, in a rational and optimising way, and
then to the best of their ability attempt to fulfil those plans.
The implications of this theory for equivalence scale analysis -
that children make a positive contribution to their parents'
standard of living - have already been discussed on pages 91 to
93, where it is argued that the policy conclusions to be drawn
from this view are not at all clear.
This view of family decision-making is probably most relevant to
relatively well-off families, and not to the poor. The metaphor
of children as consumer durables is unrealistic to the extent
that, unlike refrigerators, children are objects of affection and
concern, and have their own opinions. To many people, also, this
view may not be a realistic judgement about why people have
children. The main advantage of thinking this way is that the
new approach makes it possible to relate trends in fertility to a
well-developed body of economic theory and to make predictions
about those trends. Moreover, the alternative theory is even
less realistic - that is, that the decision to have children is
unrelated to people's other decisions about their standard of
living.
Potentially, the new theory is of considerable usefulness in
equivalence scale analysis, and in particular, is relevant to the
treatment of single parent families. Sole parents are a group
who have sometimes been ignored in the literature on equivalence
scales. In many studies, in fact, scales appropriate for sole
parent families have not been derived.(23) The costs faced by
single parent families cannot be regarded simply as the costs of
a single adult plus the costs of a child, nor as the costs of a
couple and children minus the costs of one adult. This is
because sole parent families face many of the same fixed costs as
do two-parent families, but they lack the human resources of two-
parent families. One adult has both less earnings capacity (24)
and less time to spend on non-market activities that contribute
to a standard of living than do two adults, and may therefore be
considered as an 'inefficient factory', in the sense discussed
above.
(23) This has usually been because there were insufficient

numbers of sole parents in various sample surveys for
meaningful results to be drawn.
(24) "Earnings capacity" may be defined formally as the amount of
money an adult would receive if he or she worked full-time,
full-year in the market at his or her level of capability,
and with all property treated as earning a normal income.
See Garfinkel and Haveman, 1977.
97
An analogous problem arises in regard to the indirect costs of

child-rearing, which have been defined by Cass, Keens and Wyndham
(1983, p. 19) as the earnings foregone by the person with major
responsibility for child care, usually the mother, who either
leaves paid work or reduces her hours of paid work.(25) In
general, these indirect costs do not enter into equivalence scale
analysis except to the extent that they affect a family's
measured money income. But the new theory of consumer behaviour
allows these issues of earnings capacity and the allocation of
time to be explicitly brought into the analysis. It therefore
throws new light onto the problems faced by sole parents in a way
that traditional theory does not.
Money and other resources
Another major issue is how living standards, once defined, can be

measured. The usual approach has been to analyse the
relationship between a family's money income and its consumption
of either certain or all goods and services. There are a large
number of factors that complicate the relationship between income
and consumption. The consumption patterns of families of the
same composition can vary by income level. Consequently, the
relative allowances for children can be higher at low income
levels than at high income levels. This is because better-off
households may spend more of their total budgets on goods which
are not affected by the presence of children, for example,
alcohol, tobacco or certain luxuries. Therefore, expenditures on
children, while greater in absolute terms, may be relatively less
at high income levels.
This also has implications for economies of scale. It has

generally been found that poor families spend a greater
proportion of their incomes on food than do better-off families.
Since consumption of food tends to be independent rather than
joint, overall scale economies will be less in poor households.
Poor households are also likely to have less ability to finance
any bulk buying, and less ability to buy freezers or large
refrigerators, for example, that would allow greater efficiency
in food buying or preparation. Similarly, as pointed out by
Philippa Smith (1982, p. 87), electricity charges are often
perversely structured so that small users, often low income
families, face greater unit costs than do better-off families.
Finally, the assumption that children can be added to a family
without affecting the satisfaction derived by adults from
services such as housing is probably less relevant to the poor.
If, because of their low income, families have inadequate or
over-crowded housing, the addition of children will only make the
situation worse. Overall, therefore, it can be expected that
economies of scale may be less in poor households than in average
or well-off households. Determining the equivalence scales that
are relevant at different levels of income is important.
(25) For a discussion of the time costs of children, see

Piachaud (1984).
98
The same money income may not necessarily guarantee similar

families the same standard of living. Some families may be able
to achieve a standard of living higher than that implied by their
incomes because they have an unusual commitment to maximising
their own living standards at the expense of other social
obligations, they may have access to household resources of
friends or relatives or employment-related fringe benefits, they
may be able to grow their own vegetables or carry out their own
household repairs, or they may be young, with good employment
prospects, and they may be able to borrow money and go into
debt. Other families may achieve a lower standard of living than
that implied by their income because they may be making large
savings for the future, because the family may have special
expenses, say for a handicapped member or for contributions to
relatives overseas, they may be particularly generous in giving
to charity, the family simply may not be very good at managing
money or they may be discriminated against and have less access
to credit.
Because of these sorts of factors, equivalence scales can be no

more than a rough guide to a specific family's standard of living
- they only show the income levels at which, on average,
different types of families can attain a certain standard of
living. That is, if living standards are normally distributed
around an average income figure, then approximately 50 per cent
of families with those incomes can be expected to have a lower
living standard and 50 per cent a higher standard. This should
be borne in mind also when considering what standards of living
are actually guaranteed by social security payments, or what
standard is implied by a poverty line or any other income level.
A family's standard of living may be influenced not only by
private consumption, but also by the consumption of non-market
goods, both privately and collectively. Non-market goods may be
either merit or public goods (McClements, 1978, pp. 167-168).
Merit goods include all benefits in kind, such as free school
meals in the United Kingdom, and subsidised goods and services
such as those provided by rent rebates or fringe benefits
available to pensioners in Australia. Education and health care
services are merit goods because they provide benefits to
specific individuals, whereas defence, the administration of
justice, and redistribution itself are public goods, which
society as a whole "consumes". The concept of the social wage
can encompass all these non-market goods, but as well it includes
government cash benefits which add to market purchasing power.
Some of the complexities of measuring the social wage are
discussed in Harding (1982).
By reducing the price of privately consumed goods, or by

obviating the need to pay for them at all, these non-market goods
and services may contribute significantly to household living
standards. McClements (1978, pp. 167-182) shows how merit and
public goods can be incorporated into equivalence scale
analysis. In practice, however, very little is known about the
actual distribution of non-market goods and services. To be
fully incorporated into equivalence scales it would be necessary
99
to be able to assign merit and public goods to individual

households. A data source that would combine such information
with details of household consumption patterns is a long way
away.
The unit of analysis
Further complications arise in the choice of the unit for
analysis - whether the appropriate unit is the household, the
extended family, the nuclear family or social security income
unit, or the individual. What has to be determined is how widely
income, resources and consumption are actually shared. It is
clear that the consumption possibilities of children are
dependent upon the resources available to their parents, and in
turn the resources and consumption of adults in the same
household, particularly married couples, are interdependent. For
these reasons, the unit for equivalence scale analysis must be
wider than the individual for individuals who are part of wider
units.
For analysing patterns of spending, the nuclear family or income
unit is probably too narrow, because those income units which
share households with others must be considered to share to some
extent their housing, heating, electricity and food costs. In
1982 approximately 21 per cent of Australian households were
composed of more than one income unit ( ABS, 4407.0). The
household, which has usually been taken as the analytical unit,
may be too wide to the extent that aged relatives or older
children living in the household have an independent existence,
or it may be too narrow to the extent that resources are
transferred to or from other households. The choice of unit
therefore involves a number of conflicting considerations; the
household has been taken as a compromise, the compromise which
may best represent the realities of patterns of consumption.
An implicit assumption of conventional equivalence scale analysis
is that all members of the unit decided on achieve the same
standard of living; that is, resources are equally shared within
the family or household. This is questionable (see Edwards,
1981, pp. 1-16; Pahl, 1980, pp. 313-336; and Piachaud, 1982, pp.
469-482) . To the extent that resources are not equally shared
within a household, then equivalence scales cannot reveal the
full extent of inequality, and will therefore not show the
poverty experienced by some family members, usually women and
children (Cass, 1982). Nor can equivalence scales take account
of the self-denial and sacrifices that go to make up the observed
standard of living of a household.
Moreover, it is probable that a household's overall pattern of

consumption will be affected by the degree to which resources are
actually shared and the degree to which family members have
access to individual sources of income - for example, Meredith
Edwards' study found that family allowances paid to mothers were
disproportionately used to purchase children's clothing (1981,
100
p. 8). Significantly, it could also be expected that any change

in income sharing or the pattern of income receipt within a
family would change the overall pattern of consumption of that
family. Nevertheless, intra-family sharing does not explicitly
enter into conventional equivalence scale analysis. In this
sense too, such scales are not a complete measure of the level of
welfare or poverty of a family. This problem might possibly be
addressed if information on the actual sharing of resources was
collected along with information on household expenditure
patterns. For equivalence scale analysis, however, an
individual's pattern of spending cannot meaningfully be separated
from the overall spending of the consumption unit of which he or
she is a part. This should not be taken to imply that the income
unit for social security purposes should be identical with the
consumption unit. Nor does this imply that the income unit for
social security purposes cannot be the individual. There are,
however, considerable difficulties involved in this area
(Edwards, 1983a, 1983b); great care needs to be taken in
generalising from one unit to another.
The time period

The analysis of the relationship between income and consumption
can also be affected by the time framework within which the two
are considered. There is no single time period over which it is
clearly most meaningful to make judgements about a family's
standard of living. It is current need that is relevant to
entitlements within the Australian social security system, and
therefore it is generally current income that is taken into
account to determine the level of payments. But a family's real
resources are best represented by its current income plus its net
wealth (assets minus liabilities); thus a family's standard of
living will depend on past savings and its ability to go into
debt, which in turn may depend on judgements about its future
income. The level of savings is of particular importance to
retired persons, many of whom may be able to maintain a standard
of living higher than that implied by their current income,
because they are spending from their accumulated savings.
For these sorts of reasons, a longer term measure of resources,
such as annual income, may be preferable, provided that it is
relevant to the particular unit whose income is being measured
(Ingles, 1981, p. 3). Some economists have advocated the use of
an even broader measure, such as the concept of "permanent
income" proposed by Milton Friedman (1957). "Permanent income"
is defined as the sum of income flows from property, from market
work, and from transfers from individuals or government, whether
received in money or in kind. These flows are evaluated at the
normal rate they can be expected to maintain over the long run
instead of at the current level. That is, "permanent income" is
the value of the largest level of consumption that a family can
sustain (Watts, 1977, p. 26). There are obvious problems of
measurement with this concept - actual permanent income could
only be precisely evaluated at the end of a person's lifetime.
101
Average levels of consumption over a fairly long period could be

taken as a proxy indicator of permanent income. But where normal
consumption is greater than normal income, there is no clear way
to determine whether this means a higher or lower living standard
than that implied by the simple income level. As Cass, Keens and
Wyndham (1983, pp. 13-34) suggest, low income is often
accompanied by indebtedness - people may be living beyond their
means, rather than having means beyond their apparent incomes.
Whether a family's level of consumption is sustainable or not is
the crucial issue, and this may only be determinable by a
comprehensive analysis of the relationship between its resources
and commitments over a relatively long period of time.
A family's pattern of expenditures within a relatively short time

period, such as a week or even a month, may also not be an
entirely accurate indicator of its real standard of living. The
major complicating factor is the purchase of consumer durables
which, because they represent large "lumps" of expenditure, can
inflate a family's current spending within one time period, and
therefore can inflate either its apparent standard of living or
its apparent level of indebtedness. Alternatively, a family's
standard of living could be under-estimated if an assessment were
based on current expenditure levels, because this procedure would
not identify the flow of services from durables already
purchased. In addition, a family's current spending may be
affected by its stock of durables; for example, purchases of food
may be affected by ownership of freezers, transport costs by car
ownership, and electricity costs by overall number of
appliances. The effects of these factors could only be evaluated
within a relatively long time period.
There are a number of other time-related factors that affect

judgements about a family's standard of living, and in particular
how living standards are measured in expenditure surveys. An
issue that has not been investigated in detail in the equivalence
scales literature is the effect of pregnancy and family
formation. Generally, expenditure surveys do not identify
whether family members are pregnant or whether individuals intend
to marry, but a family's pattern of expenditure may change well
before marriage or the arrival of a child. In some cases the
changes may be substantial - people may buy major appliances as
well as children's clothing and bedding. Some families may even
purchase a house in anticipation of birth. Correspondingly,
child-related expenditures after birth will be reduced because of
pre-birth spending. This will affect estimates of the costs of
children in expenditure surveys, because families will be
treated, for example, as if they had no children, when in fact
their behaviour will be appropriate for families with one child.
(Very roughly, in any one year in Australia, for every seven
families with one child, there is one family expecting a first
child.) The effect is likely to be greatest for the first child,
and to decrease for subsequent children. To an unknown extent,
the costs of children may be systematically underestimated in
expenditure surveys.
The measurement of living standards may also be affected because
of changes in family composition and because of the changeability
of income. For example, a person who becomes a sole parent or
102
who leaves school late in a financial year may have a very low
measured annual income, but because they have been part of a
wider income unit their overall standard of living may not be
accurately represented by their apparent annual income (Ingles,
1981, p. 3.). Current income, when measured, may also not be a
good indicator of living standards because it is variable,
particularly among the poor. (See Cox, 1976, pp. 423-442.) In
addition, in the analysis of trends in living standards, any
income measure may be inaccurate to the extent that it cannot
take account of changes in relative economic status because of
inflation. If the price of food, for example, rises faster than
the prices of other commodities, then the living standards of the
poor may fall, both relatively and in "real" terms, even if their
incomes rise with the overall level of inflation, because food is
a greater component of their total expenditures. This issue has
been extensively discussed in the United Kingdom, in relation to
the development of a retail price index for pensioners
(McClements, 1978, pp. 146-166; Diamond, 1978, pp. 330-335, 361-
365, 441-457). There is very limited Australian literature on
the differential effects of relative price changes, apart from
Kakwani (1980, pp. 188-190). In summary, it should be clear that
there are many issues of timing that may affect the accuracy of
measurement of a family's standard of living. It is also
apparent that many of these issues might best be approached
through a longitudinal survey of living standards.
5.2 Comparing equivalence scales

General results
The foregoing discussion should make it readily apparent that no

single method for deriving equivalence scales can be regarded as
entirely satisfactory, nor can any of the estimated scales be
regarded as indubitably correct. Nevertheless it is possible to
distinguish between methods on the basis of such criteria as the
realism of the underlying theories, the consistency of the
estimated results, and the plausibility of the derived scales.
In assessing the implications of equivalence scale research,
however, it would seem unwise to place too much emphasis on the
results of any one method, whatever its comparative advantages or
strengths. For example, how is one to weigh scales from the
Canadian approach - which are not detailed and, a priori, must be
biased - against the McClements scales - which are detailed and
plausible, but derived in an unsound way - against the ELES
scales - which have a sounder base in theory, and in which some
of the results are implausible? Indeed it is possible to develop
plausible equivalence scales without recourse to theory,
measurement or any data at all. A quite sensible set of scales
can be derived from the square root of household size. Taking
two adults as the standard and expressing the square root of
different numbers as a proportion of the square root of this base
gives values of 0.71 for a single adult, 1.00 for a couple, 1.22
for a couple with one child, 1.41 for a couple with two children
and 1.58 for a couple with three children. These results are
very similar to the scales used by Henderson and those derived by
McClements, for example. Of course, this estimating procedure
has no inherent attractions, except to those who believe in the
philosophical theories of Pythagoras.
103
Each of the apparently more scientifically based equivalence

scales may on reflection and for specific reasons be no more
attractive to policy analysts than the root N scales. McClements
(1979, p.11) notes that "there are many difficulties and pitfalls
involved in taking the parameters of highly abstract models
obtained using imperfect estimating procedures on inadequate data
and applying them to complex policy questions", but, "the
alternative to imperfect advice is usually no advice: and no
advice is often a good deal worse than imperfect advice". In
this context, the more reliable approach would appear to be to
analyse the implications of all the equivalence scale research,
rather than just a single preferred method. For this reason,
this section of the paper compares the results of all the
research previously discussed. It is important to bear in mind,
however, that each of the scales reviewed has its own strengths
and its own weaknesses.
Table 5.1 compares a wide range of equivalence scales, including
those implicit in the Australian social security system and those
of a number of overseas countries (5 in total), and a variety of
scales derived from the methods described previously (a further
55). The results of this research are analysed in two
essentially rough and ready ways. First, the overall patterns of
the scales were examined and the middle third determined - that
is, one third of the scales fall below the bottom of this range
and one-third above the top. The main Australian scales are then
assessed against this central range. For the purpose of
determining these trends, the administrative and the root N
scales were not included since they cannot be regarded as
providing independent estimates of family needs. However, the
administrative scales are compared with the central range, since
the main interest of this research is to assess the
appropriateness of existing policies.
A more precise measure of the results is given by calculating the
geometric mean of all the scales (again excluding the
administrative and root N results). The geometric mean has been
chosen primarily because it has previously been used in this
context by Stark (1972) and by Muellbauer (1975). The geometric
mean can be used for constructing index numbers, but it is
important to emphasise that the results are no more than a
summary measure of the trends of previous research.
For single adults, the central range of values is 0.59 to 0.68.
The only really implausible results are those of Lazear and
Michael, which are very high, and those of Podder, which are very
low - so low that they imply diseconomies of scale, i.e. two
people living in separate households, cooking separately, paying
housing and heating bills separately etc. spend less than two
people sharing the one household. The Henderson scales (except
for those with a head working), the ABS/SWPS (ELES) scale,
Kakwani and ABS/SWPS (Canadian) scales are within the range or
close to it. Nearly all the "administrative" scales, including
Australia's, also fall in the range. The geometric mean is
0.64.
104
For sole parents with one child, the central range is 0.86 to
0.98. The Henderson scales are in the middle of this range, as
are the ABS/SWPS (ELES) scales. The Podder scale is low. The
ABS/SWPS (Canadian) relativities are just high of the range. The
Kakwani scales are low. Many of the administrative scales are
within the range, but Australia's is well below it. The
geometric mean is 0.90.
For sole parents with two children, the central range of values
is 1.00 to 1.20. This too is a wide range. The Henderson scales
are in the middle of this range. The ABS/SWPS (Canadian) scales
fall in the range but the detailed ELES scales are well below it;
the Kakwani and Podder scales just below the bottom of the
range. A majority of administrative scales fall in the range,
but Australia's is significantly below it. The geometric mean is
1.10.
For sole parents with three children, the central range is 1.32
to 1.38. The Henderson scales are over the top of this range.
The ABS/SWPS (ELES) scales are very low, but the ABS/SWPS
(Canadian) scales are generally in range. Kakwani and Podder
both produce relatively low scales. None of the administrative
scales fall in this range (those of the UK and the FRG are
higher); the Australian pension scales are low. The geometric
mean is 1.31.
For couples with one child, the central range is 1.16 to 1.24.
The Podder and Kakwani scales are near the top of the range. The
ABS/SWPS (Canadian) and the Henderson scales fall near the bottom
of this range. The ,ELES scales are under the range, as are the
Australian pension relativities, and a number of other
administrative scales. The geometric mean is 1.20.
For couples with two children, the central (wide) range of values
is 1.30 to 1.48.The Henderson and the Kakwani scales are in the
middle of this range. The Canadian scales are near the bottom of
the range, with those derived from the ELES method being very
low. The Podder scales are near the top of the range. The
Australian pension scales are well below the range, but not so
low as the ABS/SWPS (ELES) scales. The geometric mean is 1.38.
For couples with three children, the central range of values is
1.48 to 1.70. The Henderson scales are high. The two ABS/SWPS
scales and the Kakwani scale are generally towards the bottom of
the range, while the Podder scale is close to that of Henderson.
The Australian pension relativities are well below the range. The
geometric mean is 1.59.
105
The administrative scales, as could be expected, show a wide

variety of results. It is notable that the treatment of single
adults relative to couples is quite close in the systems
examined, and as pointed out previously, also reflects the
balance of evidence from other scales. The system of the Federal
Republic of Germany is strikingly "generous" to children.
Perhaps the most policy-relevant result is that sole parent
families in Australia appear to do relatively very poorly - they
are very near the bottom rank of all scales showing the relative
position of sole parents.(26)
In the budgetary approach, the Henderson (head not working) and
Orshansky scales are similar. The Beveridge scales for single
adults are relatively low, but for couples with children they are
like other budgetary scales. Overall, these scales show somewhat
greater consistency than those derived from other approaches.
(26) For a discussion of some of the factors associated with

this situation, see Raymond and Whiteford (1984) and
Whiteford, Raymond and Moore (1984).
106
Table 5.1 Comparison between various equivalence scales *
Family type
Method of Single Single with Single with Single with Couple with Couple with Couple with Date Source
derivation adult one c h i l d two children three children Couple one c h i l d two children three children
Administrative
1. Australia 0.60 0.77 0.89 1.04 1.00 1.12 1.25 1.39 1984 Aust.
2. New Zeal and 0.60 1.00 1.09 1.17 1.00 1.08 1.17 1.25 1982 N.Z.
3. United Kingdom 0.62 0.83 1.14 1.52 1.00 1.21 1.42 1.74 1982 U.K.
4. Canada 0.63 0.90 1.02 1.14 1.00 1.12 1.24 1.35 1981 Can.
5. Fed. Rep. Germany 0.56 0.90 1.44 2.22 1.00 1.34 1.88 2.66 1980 F.R.G.
Budgetary
Henderson
6. - Head working 0.76 0.91 1.14 .44 .00 1.15 .37 1.68 1954 U.S.
7. - Head not working 0.68 0.86 1.11 .45 .00 1.17 .42 1.76 1954 U.S.
8. Plachaud 0.62 0.84 1.11 .44 .00 1.23 .50 1.82 1979-80 U.K.
9. Lovering 0.60 0.78 0.93 1.12 .00 1.12 .28 1.47 1983 Aust.
Rowntree
10. - Head working 0.81 (1.01) (1.11) ( .18) .00 1.20 .30 1.37 1936 U.K.
11. - Head not working 0.63 (0.90) (1.03) ( .09) .00 1.27 .40 1.46 1936 U.K.
12. Orshansky 0.69 (0.85) (1.17) (1.41) .00 1.16 1.48 1.72 1965 U.S.
13. Beveridge 0.59 (0.83) (1.07) (1.31) .00 1.24 1.48 1.72 1942 U.K.
Proportional
Seneca and Taussig

14. - low Income, food - - - - 1.00 1.01 1.30 1.64 1960 U.S.
15. - low Income, - - - - 1.07 1.41 1.62 1960 U.S.
necessities - - - - 1.00 1.29 1.48 1.63 1960 U.S.
16. - high income, food
17. - high income, - - - - 1.00
necessities - - - - 1.00 1.26 1.39 1.49 1960 U.S.
B.L.S
18. - food 0.60 (0.97) (1.27) (1.54) 1.00 1.37 1.67 1.94 1960-61 U.S.
19. - savings 0.70 (0.98) (1.27) (1.64) 1.00 1.28 1.57 1.73 1935-44 U.S.
Nicholson
20. - food 0.59 (0.90) (1.14) (1.34) 1.00 1.31 1.55 1.75 1953-59 U.K.
Love and Oja
21. - 1959 0.60 .00 1.20 1.40 1.00 1.20 1.40 1.60 1959 Can.
22. - 1969 0.69 .00 1.28 1.52 1.00 1.28 1.52 1.70 1969 Can.
SWPS/ABS
23. - overall basic 0.59 .00 1.18 1.35 1.00 1.18 1.35 1.53 1974-75 Aust.
24. - overall detailed 0.58 .05 1.14 1.30 1.00 1.15 1.28 1.51 1974-75 Aust.
25. - Head working 0.69 1.10 1.22 1.40 1.00 1.14 1.33 1.67 1974-75 Aust.
Habib and Tawil
26. - food 0.58 .00 1.38 1.72 1.00 1.38 1.72 2.05 1968-69 Israel
27. - food/clothing 0.52 .00 1.47 1.93 1.00 1.47 1.93 2.38 1968-69 Israel
28. - food/clothing/
housing 0.73 1.00 1.20 1.37 1.00 1.20 1.37 1.52 1968-69 Israel
29. - low Income 0.77 1.00 1.24 1.47 1.00 1.24 1.47 1.71 1968-69 Israel
107
Family type
Method of Single Single with Single with Single with Couple with Couple with Couple with Date Source
derivation adult one c h i l d two children three children Couple one c h i l d two children three children
30. - high income 0.86 1.00 1.24 1.24 1.00 1.24 1.24 1.34 1968-69 Israel
31. - Podder 0.49 (0.74) (0.97) (1.17) 1.00 1.25 1.48 1.68 1966-68 Aust.
32. - (Prals/Houthakker) 0.53 (0.72) (0.99) (1.30) 1.00 1.19 1.45 1.77 1937-39 U.K.
33. - Bureau van
Statistiek 0.53 (0.95) (1.24) (1.48) 1.00 1.42 1.71 1.95 1917 Neth.
34. - Nlcholson (food) 0.54 (0.85) (0.99) (1.19) 1.00 1.31 1.55 1.75 1965 U.K.
Consumption Theory
McCIements
35. - Young children 0.53 (0.62) (0.80) (1.01) 1.00 1.09 1.27 1.48 1971-72 U.K.
36. - Older children 0.53 (0.76) (1.01) (1.28) 1.00 1.23 1.48 1.75 1971-72 U.K.
37. Jensen 0.60 0.92 1.20 1.46 1.00 1.27 1.53 1.77 -
38. Nlcholson - - - - 1.00 1.25 1.40 - 1949 U.K.
39. Nicholson 0.64 (0.77) (0.89) (1.00) 1.00 1.13 1.25 1.35 1976 U.K.
40. Cramer - - - - 1.00 1.12 - - 1953-54 U.K.
41. A.M. Henderson - - - - 1.00 1.17 1.25 - 1937-38 U.K.
42. Rothbarth - - - - 1.00 1.15 1.20 1943 U.K.
Garganas
43. - Young children - - - - 1.00 1.15 1.21 1.33 1971 U.K.
44. - Older children - - - - 1.00 1.29 1.52 1.64 1971 U.K.
Barten (Muellauer)
45. - overall - - - 1.00 1.15 1.30 1.44 1975 U.K.
-
46. - low income - - - - 1.00 1. 16 1.42 - 1975 U.K.
47. - high income - - - - 1.00 1.00 1.11 - 1975 U.K.
48. Lazear & Michael 0.94 (1.15) (1.33) (1.53) 1.00 1.21 1.39 1.59 1960-61 U.S.
Kakwani
49. - low income 0.60 (0.81) (0.98) (1.08) 1.00 1.21 1.38 1.48 1966-68 Aust.
50. - high income 0.61 (0.81) (0.98) (1.07) 1.00 1.20 1.37 1.46 1966-68 Aust.
ABS/SWPS
51. - basic scales 0.67 0.92 1.07 1.05 1.00 1.11 1.20 1.31 1974-75 Aust.
52. - head words 0.71 (0.82) (0.86) (1.04) 1.00 1.11 1.17 1.33 1974-75 Aust.
53. - head not working 0.59 0.87 0.85 1.17 1.00 1.13 1.20 1.38 1974-75 Aust.
54. Van der Gaag and
Smolensky 0.74 1.09 1.00 1.24 1.28 1.40 1960-61 U.S.
Attitudinal
55. Goedhart et al 0.81 1.00 1.13 1.24 1.00 1.13 1.24 1.32 1975 Neth.
Kapteyn and Van Praag
56. - Young f a m i l y - - - - 1.00 1.19 1.28 1.36 1971 Neth.
57. - Older family — — — 1.00 1.14 1.21 1.27 1971 Neth.
Other
Townsend
58. - head working 0.71 0.88 1.04 1.29 1.00 1.17 1.33 1.58 1968-69 U.K.
59. - head not working 0.65 0.85 1.06 1.35 1.00 1.20 1.41 1.71 1968-69 U.K.
60. - Root N 0.71 1.00 1.22 1.41 1.00 1.22 1.41 1.58
SOURCE: See tables in text

* The bracketed results for sole parents are not given by the authors, but are derived by adding the costs of children to couples of a single adult.
108
The proportional approach, however, shows the greatest

consistency of results, with scales that are consistently at the
high end of the range, and many of which fall into a fairly
narrow range of values. This appears to reflect the biases
inherent in this method. An unsatisfactory feature of these
results is that some of them do not distinguish between adults
and children.
The results from consumption theory and utility theory are

extremely variable. Looking at specific scales within this broad
grouping, it does not appear that either the same method or the
same data source necessarily produce results that resemble one
another.
Of the other scales, the most sensible appear to be those of

Townsend, which are derived from his "relative deprivation"
poverty lines. Except in the case of single adults, his
relativities are consistently at about the middle of the range of
all values. The scales derived from the attitudinal approach
show no particular pattern.
It must be emphasised that the results discussed above, while

interesting, cannot be regarded as proving the superiority of one
set of equivalence scales over another. The choice of
illustrative scales reflects the material that was readily
available. The determination of the range of values into which a
majority of scales fall was done simply by inspection. The table
does not show the full degree of detail available from some
scales, e.g. how costs vary by age or workforce status.
Table 5.2 presents the geometric means referred to previously.

These means are a measure of central tendency, useful for judging
how far scales diverge from each other. For example, it is
notable that the results of Australian research are significantly
different from the balance of overall evidence, generally being
lower than that suggested by the other research (although still
significantly higher than the relativities in the Australian
pension and benefit system.)
Table 5.3 shows one further set of scales, those proposed by the
O.E.C.D. for "countries which have not established their own
equivalence scales" (O.E.C.D., 1982,p.37). These scales were
developed as part of the O.E.C.D. social indicators program, and
appear to be purely arbitrary. They are derived by setting the
value for a single adult as 1.0, that for second and subsequent
adults as 0.7, and that for each child as 0.5. The results shown
in Table 5.3 were then derived by re-calculating with two adults
as the base. It can be seen that these results vary quite
significantly from those shown by the geometric means or by the
central values discussed on pages 102 to 106. This variation
arises because of the high relative allowances for children and
because the O.E.C.D. results do not allow for economies of
scale. It is, of course, important to note that both the results
in Tables 5.2 and 5.3 also average out the differences that could
be expected to arise because of the effects of labour force
participation, age of children or household head, and household
income. It is to some of these details that the paper now
turns.
109
Table 5.2: Geometric means derived from equivalence

scale research
Overall Australian
Family Geometric Geometric
Composition Mean Mean
Single adult 0.64 0.61
Sole parent,
one child 0.90 0.88
Sole parent,
two children 1.10 1.01
Sole parent,
three children 1.31 1.17
Couple,
no children 1.00 1.00
Couple,
one child 1.20 1.16
Couple,
two children 1.38 1.30
Couple,
three children 1.59 1.48
SOURCE: Calculated from Table 5.1. The results for the overall
geometric mean are calculated from all scales except the
administrative and root N results. The other results
are calculated from Australian research (not including
the Henderson relativities). The geometric mean is
defined as the nth root of the product of n numbers, in
this case the relevant equivalence scale values.
Table 5.3: O.E.C.D. equivalence scales
Family Composition
Adults/Children Equivalence scale value
1 0 0. 59
1 1 0.88
1 2 1.18
1 3 1.47
2 0 1.00
2 1 1.29
2 2 1.59
2 3 1.88
SOURCE: Organisation for Economic Co-operation and Development,

1982, pp.36-37.
110
The costs of children
Table 5.4 summarises the available evidence on how the costs of

children vary by age. The table should be interpreted with some
caution. As far as possible, the table shows how costs increase
with the age of the single child in a household made up of a
couple plus one child. The table does not show the effects of
economies of scale or of the rank of children in the household.
For example, the Garganas scales in Table 5.4 indicate that a
child less than 4 years of age adds 13 per cent to the costs of a
couple. However, two children under 4 years of age will add 21
per cent, not 26 per cent, to the costs of a couple, primarily
because of economies of scale. Again, with the Van der Gaag and
Smolensky scales, a child under 6 adds 24 per cent and a child 6
to 11 years adds 32 per cent to the cost of a couple, but going
to the original source will show that a household with two
children needs only 28 per cent more income than a couple without
children. Thus Table 5.4 shows the "pure" effects of age, not of
household size.
At first glance there appears to be considerable variety in the

results reported - estimates of the costs of a child under 4
range from 12 to 24 per cent, and of a 16 or 17 year old from 31
to 52 per cent. Nevertheless, the general patterns are very
similar, indicating significant increases in costs by age, of the
order of 150 to 200 per cent.
It should also be noted that this table only provides measures of

direct costs - purchases of food, clothing etc. The indirect
costs in terms of the lost income of persons, usually women, who
give up work cannot generally be dealt with in equivalence scale
analysis. In the case of young children, these costs in the form
of foregone income may be significantly greater than the direct
costs.
The costs of working
Table 5.5 summarises the evidence available on the costs of

working. These figures have been calculated by subtracting the
equivalence scale value for a household where the heads does not
work from the value for the exactly corresponding household where
the head does work, and then expressing the difference as a
percentage of the original value of the head not working scale.
Thus these can be thought of as the increase in income required
by different types of families to achieve the same standard of
living if the household head "goes out" to work. (For couples,
it is assumed that the other spouse is not working - this issue
is dealt with in the next section.)
There is far less information on this issue, and what there is

suggests considerable variation in working costs. For example, a
single person appears to need a increment of between 14 and 40
per cent to maintain the same standard of living, depending on
the scale used. Nevertheless, there are some important
regularities in these results. In both the Rowntree and
Henderson budgetary methods a single woman requires more
compensation - of the order of 40 to 50 per cent for working
costs than a single man. In all the scales shown the single
person requires a greater proportional increase in income than
does a couple, and the proportion for a couple declines with
increasing numbers of children.
Table 5.4: Detailed equivalence scales estimates of the costs of children by age (Couple without children = 100)
SOURCE ESTIMATES SOURCE ESTIMATES SOURCE ESTIMATES SOURCE ESTIMATES
1. McClements, Age 0-4 18 2. McClements, Age 0-1 9 3. Piachaud, Age 4. Lovering, Age
United Kingdom 5-10 21 United Kingdom, 2-4 18 United Kingdom, 2 23 Austral la, 2 12
1971-72 11-22 26 1971-72 5-7 21 1979 5 27 1983 5 15
13-15 32 8- 10 23 8 32 8 17
16-18 38 11-12 25 11 35 11 22
Average 23 13-15 27 Average 29 Average 16.5
16-18 36
Average 22.7
5. Townsend, Age 0-10 17 6. Muellbauer, Age 0-4 12 7. Garganas, Age 0-4 13 8. Van der Gaag Age
United Kingdom, 11-15 25 United Kingdom 5-16 25 United Kingdom, 5-14 29 and Smolensky, 0-6 24
1968-69 Average 21 1975 Average 18.5 1971 Average 21 United States 6-11 32
1960-61 12-17 43
18 plus 46
Average 36.3
9. Supplementary Age 0-10 21 10. EEC Expenditure Age 0-2 11 11. Department of Age 0-4 15 12. Henderson Age 0-5 15
Benefit Rate 11-15 31 Survey 3-4 17 Health, Education 5-15 37 United States
, 6-15 22
Scale, 16-17 38 5-6 22 and Welfare, 16-18 52 1954 16 plus us 31
United Kingdom, Average 30 7-8 28 United States, Average 34.7 Average 22.3
November 1983 9- 10 33 1976
11-12 39
13-14 44
Average 27.7
13. Beveridge Report Age 0-4 16 14. The Amsterdam Age 0-14 27
United Kingdom, 5-9 22 Scale 15-17 (male) 52
1942 10-13 25 15-17 (female) 47
14-15 28 18plus (male) 53
Average 23 18plus (female) 47
Average (male) 44
Average (female) 40.3
SOURCES: Items 1, 2, 6, 7, 10, 11 are taken from Isherwood (1978) pp. 4-5;
Item 9 is taken from Social Work Today, 22 November 1983;
Item 13 comes from McClements (1978), p. 114; Items 3, 4, 5, 8 and 12 are
derived in other parts of this paper; Item 14 comes from Deaton and MuelIbauer (1980) p. 193.
112
Table 5.5: The costs of working - Percentage increases in income required to
maintain equivalent standard of living when household head works
1. Rowntree, United Kingdom, 1936 2. Henderson, United States, 1954
Household Type Per Cent Household Type Per Cent
Single man 14.1 Single man 18.8
Single woman 21.8 Single woman 25.0
Couple, no children 14.9 Couple, no children 13.6
Couple, one child 9.1 Couple, one child 11.7
Couple, two children 6.6 Couple, two children 9.6
3. Townsend, United Kingdom, 1968 4. ABS/SWPS (Proportional) Australia 1974-75
Household Type Per Cent Household Type Per Cent
Single person 31.5 Single person 21.1
Couple, no children 20.5 Couple, no children 7.5
5. ABS/SWPS (ELES) - Australia, 1974-75
Household Type Per Cent
Single person 39.2
NOTE: These figures have been calculated by subtracting the equivalence scale value
for a household with the head not working from the value for the corresponding
household with the head working, and expressing this result as a percentage of
the head not working scale. The exception is the result for sole parents
given in 5, in which the value for the head not working is subtracted from an
"overall" scale result.
SOURCE: See tables in text.

113
Sole parents also generally require greater proportional

increases in income than do couples to compensate them for the
costs of working.
This pattern reflects the fact that the costs of working enter
these results as fixed costs. For example, say a single man and
a married man both need an extra $50 a week to compensate for
working costs, this $50 is a greater proportion of the single
man's "standard costs" than of the married man's. Again, for a
couple without children, the base will be lower than that for a
couple with children, and hence the pattern of declining costs.
Therefore, this table should not be taken to show that the costs
of a working family decline if they have a child or extra
children. The comparison only applies to identical family types,
in work and out of work.
It may be possible to derive some further indirect information on
the costs of working, if it were assumed that the age of the
household head was a proxy for the status of working. This would
seem reasonable when comparing those over 65 years of age, who
could reasonably be assumed to be retired, with those who were of
working age. However, usually it is not then possible to control
for the work status of the spouse in such comparisons and the
results would" heed to be treated with even greater caution.
One-earner and two-earner families
Table 5.6 shows the information available on the differences
between the costs of families with working and dependent
spouses. These costs have been calculated by subtracting the
estimates of the costs of couples with and without children and
where the head works and the spouse does not from estimates for
corresponding couples where both spouses work, and then
expressing this difference as a percentage of the costs for the
couple where the head only works. As such, these figures can be
thought of as the additional compensation required by different
family types where the "head" already works, when the spouse goes
out to work.
Table 5.6 shows considerable variability between scales, and no
consistent regularity in the pattern of results emerges. Some of
the results can be considered to be more reasonable than others.
For example, Townsend's estimates of the costs faced by a working
spouse are likely to represent only those relevant to very low
income earners. Since the Townsend equivalence scales are
derived from the relative deprivation poverty standard, it is
likely that working spouses in this situation were both uncommon
and, where existing, likely to be working very few hours. It
would therefore seem reasonable to conclude that Townsend's
scales underestimate the costs faced by working spouses.
Similarly, the Henderson scale estimates are likely to be
inappropriate as a basis for comparing the average situation of
couples where the head works and the spouse does not, since they
are derived from poverty lines and are therefore not
representative of the community average situation.
114
Table 5.6: W o r k i n g and dependent spouses -

percentage increase in income required to m a i n t a i n
equivalent standard of living when spouse works
Household Type
Couple Couple Couple

No Children One Child Two Children
Estimate
1. Henderson,
United States, 1954 21.0 18.3 16.1
2. Townsend, United
Kingdom, 1968 6.0 5.1 5.3
3. ABS/SWPS (Proportional)
A u s t r a l i a , 1974-75 2.0 31.6 14.3
4. ABS/SWPS (ELES )
A u s t r a l i a , 1974-75 9.0 18.0 24.8
5. Lazear and Michael,

United States, 1972-73 30.0 - -
SOURCE: See tables in text
The two Australian results derived by the ABS and SWPS are
clearly inconsistent, since the proportional estimates rise
massively and then decline, while the ELES estimates rise
smoothly, if significantly. The ELES results, a priori , appear
more reasonable. The presence of children implies higher direct
costs due to childcare, but if these childcare costs then double
in terms of direct expenses, because the number of children
double, they should decline somewhat relative to overall costs.
The Lazear and Michael (1980) estimates were derived specifically
in order to determine the costs of a working spouse, but their
plausibility depends on an a priori judgement whether more or
less than an additional 30 per cent is required when a spouse
goes out to work.
Overall, therefore, any conclusion about the difference in costs

between a working and dependent spouse must be considered
extremely uncertain.
5.3 Equivalence scales and poverty measurement
An assessment of the relative merits of different equivalence

scales must take account of the uses to which they are to be put.
A particularly important use for equivalences is in the analysis
of the economic circumstances of families, particularly research
concerned with poverty. This issue will be discussed in detail,
115
because the choice of a particular set of scales as appropriate

for use and the way in which those scales are then applied can
have a decisive effect on any estimation of the extent of
poverty, and consequently on our understanding of the
difficulties faced by different groups in the community and the
identification of priorities for reform.
Comparison of the First Main Report of the Commission of Inquiry
into Poverty (1975) and the Social Welfare Policy Secretariat
(SWPS) Report on Poverty Measurement (1981) indicates the
sensitivity of estimates of the extent of poverty to the choice
of equivalence scales. This is shown in Table 5.7.
SWPS estimated that the number of adult income units below the
detailed Henderson poverty line in 1978-79 was approximately
460,000. These units included about 1,070,000 people. This
represented 9.3 per cent of adult income units, excluding the
self-employed, and 9.5 per cent of people in such units. The
Poverty Inquiry estimated that 10.2 per cent of adult income
units and 8.2 per cent of persons had incomes below its detailed
poverty line in 1972-73. An International Labour Organisation
(ILO) study (Beckerman, 1979) estimated that in 1973-74 around 11
per cent of adult income units and about 10 per cent of people in
such units had incomes less than the detailed Henderson poverty
line. Thus the percentage of adult income units with incomes
below the detailed Henderson poverty line seems to have fallen
between the early and the late 1970s, but the proportion of
people in such units fell only slightly, if at all.
In discussing the reasons for these findings, SWPS states:
... in 1978-79 a larger proportion of poor adult income
units were families, and a smaller proportion single
individuals, than in 1973-74. In particular, there seems to
have been a major reduction in the numbers of aged single
people with incomes below the detailed Henderson poverty
line. This may indicate the importance of the pension
increases ... But the proportion of non-aged single people
with incomes below the Henderson poverty line had increased.
There seems also to have been an increase in the number of
single parents with incomes below the poverty line ...
(1981, p 175).
The results using the simplified Henderson equivalences provide a
very different picture of the extent of poverty at various points
in time, but show the same trends as the detailed equivalences.
Using this measure, there were about 1,000,000 income units (18.1
per cent of the total) in poverty in 1978-79. These units
contained about 1,700,000 people (14.4 per cent people in such
units). From the 1973-74 income survey it has been roughly
calculated that there were approximately 1,300,000 income units
(22.7 per cent) with incomes below the simplified Henderson line
in that year, and these units contained just over 2,000,000
people (15.5 per cent of the total). The extent of poverty is
much greater than that shown by using the detailed equivalences
because these figures include juveniles, whom the Poverty Inquiry
excluded, and because the simplified scales make no provision for
the lower costs of aged persons and of persons sharing
accommodation.
116
Table 5.7: Estimates of Trends 'In Poverty' in Australia by Equivalence Scales Used (a)
DETAILED HENDERSON SIMPLIFIED HENDERSON SWPS/ABS

EQUIVALENCES EQUIVALENCES EQUIVALENCES (b)
Income Units Persons Income Units Persons Income Units Persons
No No % No No % No No %
COOO) % COOO) COOO) % COOO) COOO) % COOO)
1 972-73 400.0 10.2 784.2 8.2

1973-74 560.6 11.1 1,230.7 10.0 1,310.0 22.7 2,023.4 15.5 1.191.5 20.7 1,655.7 12.7
1978-79 463.1 9.3 1,069.2 9.5 1,023.6 18.1 1,720.9 14.4 596.4 10.5 924.1 7.7
(357.7) (7.2) (685.4) (6.1)
NOTES: (a) These figures should be interpreted as rough indicators of trends, not precise estimates of the extent of
poverty.
(b) The figures in brackets are the numbers and proportions of adult income units and persons (i.e. excluding
juveniles) with incomes below the SWPS/ABS equivalents to the 'Henderson poverty line 1 .
SOURCE: SWPS 1981, pp. 168, 169, 171, 176, and own estimates.
117
The results using the ABS/SWPS equivalences are very different

again. In their Report on Poverty Measurement, SWPS took the
Henderson poverty level for a married couple, head working and
with no children, and adjusted this benchmark ($4,729 in 1978-79)
by their new relativities. They then estimated that in 1978-79
there were some 596,000 income units (10.5 per cent of the total)
containing about 920,000 people (7.7 per cent) with incomes below
the resultant 'poverty lines'. If juveniles were excluded these
figures would be reduced to 358,000 income units (7.2 per cent of
adult income units) and 685,000 persons (6.1 per cent). From the
1973-74 income survey it has been roughly calculated that in that
year there were 1,190,000 income units (20.7 per cent) in
'SWPS/ABS poverty'. These units included about 1,660,000 people
or 12.7 per cent of the total.
On this measure, therefore, poverty declined substantially
between 1973-74 and 1978-79 - by almost 50 per cent in fact.
This reduction was much greater than that shown by either the
detailed or simplified Henderson equivalences because SWPS/ABS
estimate that the costs of children and of single persons are
comparatively small relative to married couples. For example,
the additional costs of a child according to Henderson is 20 per
cent of the costs of a family composed of a working head and a
non-working wife only, but SWPS allow only 11 per cent more for a
child. According to Henderson, a single working person needs 75
per cent of the income of the standard couple; according to SWPS,
71 per cent.
These apparently small differences significantly affect estimates
of the extent of poverty, due to the high degree of clustering in
the distribution of income. Because the Australian social
security system provides flat-rate, income-tested payments and
because most pensioners have no other private income, a large
proportion of persons receiving those payments have total incomes
at or just above the payment level. For example, in 1973-74 the
standard rate of age pension was around $1,200 and there were
313,000 aged, one person income units with incomes between $1,200
and $1,400. This was 53 per cent of all aged one person income
units, yet only 6 per cent of other one person income units had
incomes in this range. Again, when in 1973-74 the age pension
for a couple without children was $2,100, nearly 125,000 aged
married couple income units or 40 per cent of aged married
couples had incomes between $2,000 and $2,500. Overall, only 2.5
per cent of all income units had incomes in this range.
Estimates of the extent of poverty in Australia will therefore
depend largely on the relationship between the level and
structure of pensions and benefits and the poverty lines and
equivalence scales used in the analysis. In nearly all cases the
relativities in the social security system fall between the SWPS
and the Henderson equivalences. Because of this, and the small
real increase in the value of pensions between 1973-74 and 1978-
79, a significant number of income units were "moved out" of
poverty on the Henderson basis, and a very large number on the
basis of SWPS relativities. These changes were to some extent
offset by the increases in unemployment and the increasing number
of sole parents over this period.
118
A further point to note is that poverty analysis is not only

sensitive to the choice of relativities but also to the choice of
the type of family to use as a standard. In their analysis SWPS
took the standard family to be a married couple, head working,
wife not working and with no dependent children. The Henderson
poverty level for this type of family of $4,729 in 1979-80 was
used as a benchmark. As SWPS notes (1981, p 167), estimates of
the extent of 'Henderson poverty' are not affected by this
choice, but estimates of the number of persons below the 'SWPS
poverty line' would have been very much greater if any other type
of family had been taken as the benchmark. This again is because
of the comparatively low allowances for children and single
individuals in the SWPS relativities. For example, using the
Henderson poverty line for a couple without children as a
benchmark ($4,729 in 1978-79), the 'SWPS equivalent' for a couple
with two dependent children was $5,533 (i.e. $4,729 x 1.17). But
the actual Henderson poverty line for a married couple with two
dependent children was $6,621 (i.e. $4,729 x 1.40). If $6,621
had been used as the standard, then the 'SWPS equivalent' for a
couple without children would have been $5,659 (i.e. $6,621 /
1.17), not $4,729 (i.e. $6,621 / 1.40). And so on.
Thus if SWPS had taken their benchmark to be the Henderson
standard family of a married couple with two dependent children,
the entire set of 'SWPS poverty lines' for different types of
families would have consistently been between $800 and $1200 more
than those derived from the married couple without children
benchmark. As a consequence, roughly 2,000,000 persons rather
than around 900,000 persons would have been estimated to be below
the SWPS equivalent to the poverty line.
The choice of a particular set of equivalence scales as
appropriate for application also affects the identification of
priorities for changes. As previously discussed, the SWPS Report
on Poverty Measurement found that the percentage of adult income
units with incomes below the detailed Henderson poverty line fell
between 1973-74 and 1978-79, but the proportion of people in such
income units fell only slightly. In particular, there seems to
have been a major reduction in the numbers of aged single people
with incomes below the detailed Henderson poverty line. In 1973-
74 there were 216,900 aged single persons (or 26.4 per cent of
all aged single persons) with incomes below the detailed line.
As a group only sole parents with two or more children were more
likely to be in poverty. In 1978-79 there were 52,400 aged
single persons (9.7 per cent) with incomes below the detailed
line.
This improvement in the economic status of the aged seems to have

been due to the general increases in pensions and benefits - the
maximum rate of most pensions was a higher percentage of Average
Weekly Earnings in 1978-79 than it had been in 1972-73 or 1973-74
(although in many cases there had been a decline since 1976-77).
Thus SWPS found on this measure that the circumstances of the
aged improved, and on the basis of both the detailed Henderson
line and their own relativities, sole parents remained the most
disadvantaged of groups. It might be judged that this conclusion
is also supported by the finding that the relativities for sole
parents implicit in the pension system is low in comparison with
119
other sets of equivalence scales. Would it therefore be

reasonable to draw the conclusions that income security policies
for the aged have been a "success", that assistance for the aged
should stay much as it is, and that priority for additional
assistance be given to sole parents?
Any answer would need to be qualified by the observation that the
improvement in the incomes of single age pensioners was not very
great. In 1973-74, the standard rate of age pension was $1,370,
while the Henderson poverty line for a single, female, age
pensioner living by herself was $1,429. In 1978-79, the standard
rate of age pension was $2,735 and the comparable Henderson
poverty line was $2,655. Thus while nearly 150,000 single age
pensioners "moved" from below to above the Henderson poverty line
between 1973-74 and 1978-79, their incomes moved from $59 ($1.13
per week) below the Henderson poverty line in 1973-74 to $80
($1.54 per week) above that line in 1978-79. In terms of 1981-82
dollars, this change represents an increase of $4.70 per week; a
useful but hardly a major improvement in the living standards of
the aged.
This example mainly goes to show that the use of a single poverty
line which supposedly separates the poor from the non-poor
population may conceal as much as it reveals. But is also shows,
as discussed previously, that in analysing the circumstances of
low income families and trends in poverty over time a very strong
influence may be exercised by the relationship between the social
security system and the poverty lines and equivalence scales
used. A further factor in this case is that the detailed
Henderson poverty line suggests that aged single women have lower
costs than aged single men, while pension and benefit rates do
not so vary. Partly as a consequence, the relatively small real
increases in the rates of pension have apparently decreased the
extent of poverty amongst single aged women by a substantial
amount.
In summary, estimates of the extent of poverty at the one point
in time may vary from 7 per cent to 18 per cent of income units
or from 680,000 people to 1,720,000 people or more, depending on
the precise choice of equivalence scales and benchmark.
Similarly, the extent of poverty in Australia either decreased
slightly if at all in the 1970s or dropped by 50 per cent
depending on the relativities used.
5.4 Objectivity, values and needs
Such results might be considered to be little more than
statistical fiddling. It might be noted, however, that none of
these results is inconsistent in principle with the method used
in the First Main Report of the Commission of Inquiry into
Poverty - that is, the arbitrary choice of a benchmark poverty
line for a standard family, and the subsequent application of a
set of equivalence scales derived without any study of the actual
needs of Australian families.
An alternative interpretation of the meaning of this variability
in poverty estimates is that there is in fact no "true" measure
of poverty. Beckerman and Clark, for example, argue:
120
... there are so many reasonable ways of measuring poverty

that one can obtain any answer one likes by the appropriate
choice of measure. This also means, unfortunately, that
whilst, from the point of view of stimulating the
imaginative construction of hypotheses, attempts to make
comparisons over time, or between countries may be very
interesting and illuminating, from the point of view of
their contribution to scientific evidence they are usually
not worth the paper they are written on (1982, p.l).
The examples given previously show that it is certainly possible

to come up with nearly "any answer one likes by the appropriate
choice of measure", particularly the choice of equivalence
scales. Well then, is there any "true" measure of poverty, and
are there "true" equivalence scales?
This question can best be answered by asking a series of further

questions. First, is the derivation of the "true" equivalence
scales any different from the derivation of the "true" proverty
line?
The SWPS Report of Poverty Measurement appears to conclude that

it is possible to distinguish between the two. They judged that
none of the criteria for measuring poverty were entirely
satisfactory and that "in particular we do not feel that any of
the criteria which we have discussed would allow us to state with
confidence whether the money amounts of pensions and benefits
were adequate or not" (1981, p.60). Yet, SWPS argues that
despite the theoretical and practical limitations of the
"Canadian" approach to estimating equivalence scales, the results
may be useful for indicative and analytical purposes (p.108). A
similar conclusion is reached in respect of the ELES scales
(p. 109, pp 141-142) .
The force of this argument is substantially undermined by the

observation that the two methods for deriving equivalence scales
that were approved of by SWPS have both been used by other
researchers to derive poverty lines at the same time as
equivalence scales. In fact, in both cases the equivalence
ratios can be thought of as the direct derivatives of poverty
lines. The "Canadian" approach was originally developed by Love
and Oja (1977) with the specific intention of providing a measure
of poverty line living standards. SWPS implicitly maintained the
poverty line interpretation by, like Love and Oja, adding a
"reference level" of expenditures. In the other case it has been
seen that the pre-committed expenditure level can be interpreted
as an absolute poverty line in the LES model, and a relative
poverty line in the ELES model. It has also been shown that the
resultant "poverty lines" are implausibly high. But exactly the
same problem of plausibility applies to the ELES equivalence
scales - the pre-committed expenditure levels were not attained
by 30 to 40 per cent of the population and the scales cannot be
considered to be applicable to these low income groups. There is
therefore a logical inconsistency in the SWPS argument.
121
A further point to be noted, as this paper has shown, is that in

practice the exercise of deriving equivalence scales has always
been closely linked to that of deriving poverty lines. The
majority of equivalence scales are by-products of poverty
research. The majority of researchers interested in estimating
equivalence scales have wanted to use such scales either directly
in poverty measurement or in attempting to determine the
appropriateness of relative levels of payment in the social
security system. Moreover, the problems and issues involved in
deriving equivalence scales are not substantially different from
those involved in determining a poverty line. Given the
contentious nature of most poverty lines, it may be felt that the
derivation of "objective" equivalence is doomed to failure, and
the attempt should be abandoned. But if equivalence scales did
not exist, it would still be necessary to invent them.
Equivalence scales are important because they are unavoidable.
It has been seen that estimates of the extent of poverty can be
substantially affected by the equivalence scale used. If no
explicit equivalence scales are used in poverty research, then
the analysis simply implies that all families have the same
needs, no matter what their size, composition or
characteristics. If a simple per capita equivalence scale is
used, then the analysis assumes that the needs of adults are the
same as the needs of children, and that the needs of children do
not vary by age or that the needs of adults do not vary with
social, economic or physical disability. Only by explicitly
dealing with these sorts of issues, is it possible for poverty
research not to give a potentially very misleading impression of
economic and social realities.
Equivalence scales are also unavoidable in the field of social
security policies. For example, the relationship between the
base rates of pension and additional payments, such as family
allowances, additional pension and benefit for children and
mothers'/guardians' allowance provides a set of equivalence
scales. Similarly, the relationship between the tax threshold,
family allowances and rebates for dependent spouses or sole
parents also embodies a set of equivalence scales.
A judgement about relative family needs is a necessary and direct
component of a more general evaluation of alternative income
security policies. A number of criteria can be suggested for
evaluating alternative policies (Whiteford and Stanton, 1983, p.
53). These include:
Adequacy - Is the current or proposed level of income
support sufficient to allow individuals and families to
achieve an 'adequate' standard of living? (Adequacy
may be judged by reference to a poverty line or
relative to other standards of living in the
community.)
Equity - A concern with horizontal equity implies that

people in like circumstances should be treated alike.
In practice this is taken to support different
treatment of people with the same income but differing
calls on that income, particularly differing family
122
responsibilities. Vertical equity is the concern that

those who are more well-to-do should shoulder greater
burdens than the less well-off, or that the poor should
receive greater assistance than those better-off. This
implies varying taxes and social security payments
according to income and/or capacity to earn income.
Incentive Effects - What effects do programs have on

work, savings and investment, family size and
composition or family formation and dissolution,
economic growth and national productivity?
Efficiency - There are four basic concepts of

efficiency - target efficiency, technical efficiency,
administrative efficiency and economic efficiency.
Concern with target efficiency, which is usually taken
as the most important of these issues, leads to the
consideration of what proportion of the benefits of a
program go to the non-poor as well as the poor
(vertical efficiency), and what proportion of the poor
or other target groups actually receive the intended
benefits (horizontal efficiency).
Stigma - What degree of stigma is associated with the

source, form or administration of social security
programs, and what effect does this have on take-up of
benefits?
Cost - What are the total expenditures at all-levels of

government, taking into account savings in other
programs, tax drawbacks, and costs due to changed work
effort or other behavioural changes in the population?
Political Support - What is the nature and extent of

approval for a given program?
The consideration of many of these issues can require the use of

a set of equivalence scales. This is most clear in relation to
the criterion of horizontal equity, for an equivalence scale is a
practical attempt to define 'like circumstances'. Since an
equivalence scale may also be used to re-rank families in the
distribution of income it is also a guide to vertical equity,
e.g. a couple with two children and an income of $6,000, say, is
actually poorer than a single person with an income of $4,000.
Again, a judgement about the adequacy of pension and benefit
rates can scarcely be made without relating the differing levels
of payment to differing needs of families of different size and
composition. It is also axiomatic that work incentives and
incentives to form or dissolve families will be affected by the
relativities in the rates of pension and benefit. For example,
the Commission of Inquiry into Poverty, while arguing that it
would be preferable to treat each adult as a separate income unit
for social security purposes, concluded that such a system would
result in inadequate pensions for people who live alone. As a
result "what some would call a positive incentive to live in
social groups would become in practice a ruthless compulsion"
(1975, p.24). It should also be clear that the financial cost of
any income security scheme will be directly affected by decisions
123
about the relative payments to be made to different types of

families. Finally, the political acceptability of the social
security system and of proposals to reform it will depend on
public perceptions of how fairly the system treats different
kinds of families. Some of the most significant debates in
social security in recent years have concerned assistance to
families, the appropriate income unit for income security
purposes and the appropriateness of assistance for sole parents.
All these involve making judgements about relative family needs.
Indeed, all the above criteria broadly relate to the issue of the
fairness of the social security system, either in relation to the
fairness of treatment of different types of families within the
system or fairness of treatment relative to the community
generally.
A reasonable degree of precision in these judgements is clearly

desirable. On the one hand, the living standards of all
pensioner and beneficiary families are substantially determined
by these effective judgements. For example, since 1976 most
basic rates of pensions and benefits have been automatically
indexed each May and November according to movements in the CPI
over the preceding six months to December and June respectively.
However, the additional payments for children and for sole
parents have not generally been indexed. Again, within the
personal income taxation system, the value of tax rebates for
sole parents and for dependent spouses with children has
generally been increased in real terms since 1976, while family
allowances have not been indexed. (See Raymond and Whiteford,
1984; and Whiteford, Raymond and Moore, 1984, for further
details.) The result has been an effective redistribution of tax
burdens and of social security benefits, with a large negative
impact on families with children, particularly the families of
pensioners and beneficiaries. For example, between 1976-77 and
1983-84 the value of the pension for a sole parent pensioner with
two children and with nil private income declined by around 5.6
per cent in real terms, while the real disposable income of a
single wage and salary earner with a gross income equal to
Average Weekly Earnings increased by 8.8 per cent over the same
period. These and other disparities have been significantly
reduced by decisions taken in the 1983-84 and 1984-85 Budgets;
nevertheless, the conclusion is clear that the failure to index
additional payments implies a fairly arbitrary redistribution of
income security and of tax burdens - a redistribution of income -
between different types of families. This is not to argue that
the distribution of income in 1976 or in any other year was the
"right" distribution, but that if judgements about relative
family needs are not made explicitly, they will be made
implicitly, perhaps randomly and with unintended consequences.
The corollary of this is that within any specific definition of
relative family needs, it is not possible to be "over-generous"
to one type of family without disadvantaging others. For
example, if it was reliably determined that a single individual
in Australia needs on average 60 per cent of the income of a
couple to attain the same standard of living, and if there were
additional funds available for welfare, then it would not be fair
124
to adopt the Henderson head not working relativities, say, and

use the additional funds solely to pay single pensioners 68 per
cent of the rate for couples. In this sense, the social security
system is a zero-sum game - because social security funds are
limited (even if they were to be doubled, the funds would still
be finite), it is not possible to allocate resources to one group
without effectively taking them from another. Thus, judgements
about equivalence scales are particularly important to maintain
equity in the treatment of families.
Finally, and perhaps most compellingly, equivalence scales are
important because of their significance to individuals. Whether
the child of a pensioner or beneficiary requires 11 per cent, 15
per cent or 20 per cent of the pension for a couple may appear
unimportant when it is considered that this may imply only an
additional $2 or $5 per week. Some may consider that such an
increase would make no difference to the structure of inequality;
others may believe that such a small amount could make no
difference to the ability of families to cope. But:
"Annual income twenty pounds, annual expenditure nineteen
nineteen six, result happiness. Annual income twenty
pounds, annual expenditure twenty pounds ought and six,
result misery" (Charles Dickens, David Copperfield ,Chapter
12).
In policy application as in poverty analysis, small differences
between the relativities in a set of equivalence scales and the
relativities in the structure of pensions and benefits can have
great significance. The words of Mr Micawber testify to the fact
that apparently small amounts of money can have a decisive effect
on the well-being of families "living on the edge".
Unfortunately, the conclusions that equivalence scales are

unavoidable and are of great importance do not resolve the
problems of determining whether "true" or "valid" scales are
derivable, and if so what they are.
Scepticism about the results and implications of most equivalence
scale research is well-justified. As McClements points out,
"there are many difficulties and pitfalls involved in taking the
parameters of highly abstract models obtained using imperfect
estimating procedures on inadequate data and applying them to
complex policy questions "(1979, p.11). But scepticism about
the very possibility of deriving true equivalence scales is more
problematic. Menges, in commenting on Barten's 1964 paper, the
precursor of most modern approaches to deriving equivalence
scales, noted:
"the main impression one has got from ... this paper ... is
that of econometric optimism. If one considers all the
dubious assumptions that go towards econometric model
building and parameter estimation, optimism does not seem
justifiable . ...(To) question whether true and stable
structures can be found in econometrics is to question the
possibility of economic theory at all. Economics perceives
or attempts to perceive behind the ever changing realities
125
the true causal system which is fundamental and constant.

Relative to this, it may seem that the goal
of econometrics - to find a true, stable structure for a
certain well-defined time-span - is not so immodest. But
the justification of econometric optimism depends not only
on the availability of adequate data and on electronic
equipment but even more on the creative power of the
scientists themselves ..." (in Barten, 1964, p.296).
Barten responded to these comments, as follows:
"In econometrics most hypotheses go untested. In so far as
we do test, the null hypothesis is usually a trifle compared
with the body of assumptions which together make up the
sustained hypothesis. In this respect, econometrics is
something of a faith and as with most faiths it has its
sceptics. The sceptics have contributed much to the
development of econometrics by pointing out defects and
inconsistent assumptions. Another area where the required
degree of faith is usually greater than is desirable is that
of the data used. I often think that the facts on which we
make our inferences are more dubious than our assumptions
and the logic of our theory. Therefore, I would hesitate
before doing away with economics on the basis of a mere
sample. If this attitude brands me as an optimist, I will
wear the stigma without shame" (in Barten, 1964, p.297).
These views reflect a conflict underlying all research on poverty
and relative family needs. Few economists would reject the very
possibility of valid economic theory simply on the basis of the
complexities involved in equivalence scale research, but many may
consider that it is not possible to determine poverty or needs
objectively. Yet very few "non-experts" would believe it was not
possible to talk meaningfully about poverty or needs. In the
everyday, practical, if unscientific, world the reality of needs
and poverty is self-evident.
As indicated by the comments of Menges and Barten, equivalence
scale research raises fundamental issues about economic theory
and the status of economics as a positive science. Problems
arise primarily because of the apparent severity of the standards
of objectivity and validity suggested by some economists. It
often appears to be suggested that economics should incorporate
what are understood to be the standards of the natural sciences,
and that the economic approach is capable of producing
equivalence scales that would have the status of the laws of
thermodynamics. Correspondingly, earlier approaches to the
derivation of equivalence scales are perceived to be
"unscientific". The SWPS Report on Poverty
Measurement epitomises this standard when arguing that poverty
lines could not be validly determined, but equivalence scales
could. It is a truism of the economic approach that it is
objective or positive, while alternatives such as budget-based
scales involve subjective or normative judgements (Podder,
1971).
126
Objectivity is an emotive term, and therefore for an approach to

be described as objective is immediately to place the seal of
approval on it. Correspondingly, to describe an approach as
subjective is to imply that it is unreliable. Of course, the
conclusion that positive judgements are to be preferred to
normative judgements is itself a normative judgement. But, in
the case of equivalence scales it can scarcely be argued with any
credibility that the economic approach is "objective" in any pure
sense. The inconsistency of the SWPS argument comparing
equivalence scales and poverty lines has been shown. The many
judgements involved in deriving equivalence scales (for example,
the choice of cost functions or demand functions, and the
lacunae of the data and the theories - the avoidance of the
issues of decision-making within the unit or of the allocation
of time, for example) have also been shown. Most importantly
the economic approach to the derivation of equivalence
scales rests on three non-positive judgements: first, that the
utility derived from children is not relevant, at least in the
short term, to the welfare of families; second, that
interpersonal comparisons of utility are valid; and third, that
the observed behaviour of households is a guide to their needs.
Thus on the general standards by which some economists judge
questions of method, the economic approach to the derivation of
equivalence scales fails to be objective. It is therefore
possible to conclude either that objective equivalence scales are
a chimera, or that the standards of objectivity proposed are
unrealistic.
The second line of argument has been put convincingly, if in
another context, by McCloskey (1983) in The Journal of Economic
Literature;
"The official rhetoric, to which they (economists) subscribe

in the abstract and in methodological ruminations, declares
them to be scientists in the modern mode. The credo of
scientific method, known mockingly among its many critics as
the Received View, is an amalgam of logical positivism,
behaviourism, operationalism, and the hypothetico -
deductive model of science. Its leading idea is that all
sure knowledge is modeled on the early twentieth century's
understanding of certain pieces of nineteenth century
physics" (p. 484).
"Modernism promises knowledge free from doubt, metaphysics,
morals and personal conviction; what it delivers merely
renames as Scientific Method the scientist's and especially
the economic scientist's metaphysics, morals and personal
convictions" (p. 488).
McCloskey also refers to Polanyi's observation that the
methodology of modernism in economics sets up "quixotic standards
of valid meaning which if rigorously practiced would reduce us
all to voluntary imbecility" (p. 488). Precisely the same point
has been made in this paper in discussing whether poverty
research could be objective or not, and precisely the same point
applies to equivalence scale research. The analysis of economic
and social conditions is not the same as the analysis of the
127
behaviour of sub-atomic particles. In any case, as McCloskey

implies, the state of theory in current physics and in
mathematics has moved on considerably since the late nineteenth
century.
Again, as J.M. Keynes put it to R.F. Harrod in 1938, during a

discussion of the latter's presidential address to the Royal
Economic Society:
"It seems to me that economics is a branch of logic, a way
of thinking; and that you do not repel sufficiently firmly
attempts... to turn it into a pseudo-natural science ...
Economics is a science of thinking in terms of models joined
to the art of choosing models which are relevant to the
contemporary world. It is compelled to be this, because,
unlike the typical natural science, the material to which it
is applied is, in too many respects, not homogeneous through
time. The object of a model is to segregate the
semi-permanent or relatively constant factors from those
which are transitory or fluctuating so as to develop a
logical way of thinking about the latter...
In the second place, as against Robbins, economics is
essentially a moral science and not a natural science That
is to say, it employs introspection and judgements of
value...
I want to emphasise strongly the point about economics being

a moral science. I mentioned before that it deals with
introspection and with values. I might have added that it
deals with motives, expectations, psychological
uncertainties. One has to be constantly on one's guard
against treating the material as constant and homogeneous.
It is as though the fall of the apple to the ground depended
on the apple's motives, on whether it is worthwhile falling
to the ground, and whether the ground wants the apple to
fall, and on mistaken calculations on the part of the apple
as to how far it was from the centre of the earth" (in
Moggridge, 1980, pp. 28-29)
It would seem reasonable to conclude that further research will
not produce the eternally true and valid equivalence scales or
the true and valid poverty lines, whose status can be considered
analogous to that of the periodic table or the law of gravity.
Social research can never lead to such certainty. Yet, while
absolute objectivity may be an unattainable goal, or as Piachaud
puts it, the Holy Grail (quoted in Whiteford, 1981), this does
not mean that social research is meaningless and purely
subjective. Within the field of equivalence scale research,
there are clearly approaches which are wrong and also aproaches
which are less flawed than others.
128
5.5 An equivalence scale for Australia?

A number of criteria can be proposed for assessing this more
circumscribed notion of the validity of different equivalence
scales. First, the concept of validity can be thought of as
having three aspects - theoretical validity, empirical validity
and consensual validity.
To assess whether a set of equivalence scales is theoretically
valid, it would be necessary to take account of the logical
consistency and the comprehensiveness of the model, the realism
of the underlying behavioural assumptions and the role of
subjective judgements in the model. For example, both the Prais-
Houthakker and the Barten models are preferable to the
proportional approach in which only part of a household's
expenditures is analysed and which is therefore less
comprehensive than later models. Similarly, the Townsend
equivalence scales would seem preferable to scales derived from
budget studies because they are based on a more comprehensive
analysis of what families need, and because they are derived from
a logical model of how standards of living are to be measured,
whereas budget studies generally involve no explicit model of
living standards. Again, a weakness of the Prais-Houthakker
model is the unrealistic behavioural assumption of non-
substitutability between goods, while in the ELES model the
assumption of linear Engel curves is similarly unrealistic. The
major difference between the economic and the non-economic
approaches is that in budget studies there are usually a very
large number of subjective judgements, while in utility theory
there are a small number of stronger subjective judgements. On
the basis of the earlier discussion in this paper on all of the
approaches, the Townsend scales and the Barten/ELES model, each
in their own very different way, would appear to be theoretically
superior to other approaches, not because they are without flaws,
but because these flaws are not as significant as those of the
budgetary, proportional, Prais-Houthakker or attitudinal scales.
The main criterion of empirical validity is that the scales are
correct. Unfortunately, what are the correct relativities can
never be directly proved, although it is possible to infer what
is incorrect. For example, equivalence scales should be
plausible, generally rising with the size of the household but
showing economies of scale. A priori, it is implausible that a
single individual requires only 49 per cent of the income of a
couple, as suggested by Podder, or that an individual requires 94
per cent of the income of a couple, as suggested by Lazear and
Michael. Similarly, the detailed basic equivalence scales
derived by SWPS and ABS using the ELES method are implausible
when they imply that the costs of a sole parent with two children
are less than the costs of a sole parent with one child. What is
a plausible estimate of the costs of a child is more difficult to
determine. It can be suggested, however, that Seneca and
Taussig's estimate that a child adds only 1 per cent to the costs
of a couple is implausible, as is Habib and Tawil's estimate that
a child adds 47 per cent. Similarly the pattern of additional
costs implied by the detailed basic ELES equivalence scales is
implausible - where the head works and the wife does not, the
129
first child adds 11 per cent, the second 6 per cent, the third 16
per cent, the fourth 3 per cent and the fifth 17 per cent. It is
difficult to conceive of the reasons why this should be so.
A further facet of empirical validity is that scales should be

relevant to the country in which they are used. This is the
great weakness of artificial scales such as the geometric mean
derived earlier, which essentially average-out a wide range of
influences and are therefore unlikely to reflect actual
conditions in any specific country. This is also of course the
major problem with the Henderson poverty lines/equivalence
scales. There is no reason at all to believe that the relative
needs of families in New York in the 1950s are similar to those
in Australia in the 1970s and 1980s. Indeed, the analysis
carried out by the Social Welfare Policy Secretariat (1981, pp.
133-134) and by Manning (1984, pp.48-62) indicate considerable
differences between the expenditure patterns of Australian and
U.S. families.
The final aspect of validity is consensual validity, which can be

thought of as public acceptability. Public acceptability is an
important criterion in poverty research and in setting social
security payments or taxation rebate levels. Without validity to
the public, the results of poverty research are likely to be
dismissed as unrealistic, and if social security or taxation
policies are held to reflect invalid estimates of relative needs,
the results may include taxpayer "revolt", tax avoidance or
evasion or stigmatisation of social security recipients. To a
large extent, consensual validity will rely on theoretical and
empirical validity. If a set of equivalence scales are widely
known to be based on an illogical or inconsistent model of family
behaviour, or if they are outdated or irrelevant to the country
in which they are used, then they should lack consensual
validity. But another important aspect of the consensual
validity of different equivalence scales is the comprehensibility
of the methods used. For example, Isherwood (1978, para 13)
notes that there is a strong intuitive appeal in the equivalence
scales derived from budget studies. The items that are included
in the budget are clearly specified, and the main judgements
involved concern what to include in the budget and do not involve
judgements about technically sophisticated methodology. In
contrast, the approaches derived from utility theory are
generally not so palatable to the layperson and may therefore be
more likely to be considered suspect. One can imagine the
reaction of clients of the Department of Social Security to being
told that "experts" had calculated that their pension levels
should be cut, or at least should not rise in line with
assistance to other types of families (effectively the same
thing), and that this was on the basis of a theory and estimating
techniques which the experts could not actually explain in an
intelligible manner to the families affected.
However, the literature on equivalence scales, even those derived

from budget studies, is generally of a technical nature, and the
serious flaws in some scales are not well appreciated.
Consequently, in Australia, one approach is in public use even
though an appraisal of its merits would indicate that it should
130
not be. These scales are, of course, the Henderson scales, which
can be judged to lack both theoretical and empirical validity,
even if they have a considerable amount of public support.
Manning (1982, pp.4-5) argues that the Henderson equivalence
scales should continue to be used for the time being until
something better is developed to replace them. He notes that
"the expectations created by long-established relativities are a
force to be reckoned with in the politics of social security, and
while a proposed alternative equivalence scale may serve to
indicate groups which should receive priority in any increase in
rates, few reformers are willing to tie their whole campaign to a
particular scale" (p.5). "Long-establishment" is not a
particularly convincing argument for anything, particularly not
for the use of a set of equivalence scales. The weaknesses of
the Henderson scale were well recognised at the time of the
Poverty Inquiry. The First Main Report stated:
"Relativities between income units of different size and
composition must be reconsidered when they are available,
and this is not just an exercise in arithmetic. Studies
elsewhere have shown that actual expenditure data are
necessary but not sufficient to determine needs. They must
be supplemented by nutritional studies, studies of housing
and other reseach" (1975, p. 300).
The main conclusion of this paper must be that no set of

equivalence scales presently in use in Australia can be said to
combine theoretical, empirical and consensual validity. The ELES
scales claim theoretical validity, if nothing else, but it has
been seen that even this is questionable. The other scales
derived by SWPS and ABS have even less claim to theoretical
rigour, and like the ELES scale have not been tested in practice
and have not gained wide adherence.
While there are therefore many good reasons for rejecting nearly
all available equivalence scales, the problem remains that
equivalence scales are unavoidable in many important areas of
social research and social policy, and some sort of choice must
therefore be made. This raises a specific conflict for the
author of this paper - after spending considerable time in
criticising all available equivalence scales, it seems necessary
to opt for one of the discredited approaches. In this context, I
would make a very tentative choice based on the full range of
research. For indicative purposes (for example, in terms of
setting goals for social security rates) I would choose the
"central range" of equivalence scale values discussed on pages
102 to 106. For the purposes of Australian poverty measurement,
where the scales used most necessarily be precise, I would choose
the geometric mean of the Australian research, shown in Table 5.2
on page 108.
These judgements can clearly be subject to substantial
criticism. Rather than choosing one discredited approach, I
would opt for the average of all of the discredited approaches!
(27) This should not be taken to suggest that successive mistaken
(27) i.e. "running with the pack". See Manning, 1982 p.12.
131
studies are converging towards the right answer. No one could

have any confidence that this is so. Nevertheless, what is most
important is the recognition that a choice must be made, even
while any choice can be subject to substantial criticism. Others
may wish to choose a different set of scales; if so it is
necessary to justify that choice without disguising the flaws and
weakenesses of the approach adopted.
If social policies are to represent more than rough justice, it
is clear that further research is essential. Useful research can
be carried out under many different auspices. In 1984 the
Australian Bureau of Statistics undertook another Household
Expenditure Survey. Unfortunately, not all of the problems with
previous HES data that were noted in the SWPS poverty measurement
report will be corrected in the 1984 HES. Nevertheless, the
first priority should be for further testing of the ELES method
on the new data. The Bureau of Statistics also appears to be
moving towards the policy of releasing information on tape on a
unit record basis. If HES data are released in this form, this
would enhance research that, without the use of formal models of
household behaviour, seeks to investigate the correlation between
income, levels of expenditure, patterns of consumption and family
characteristics. The research carried out by Cass, Keens and
Wyndham on the direct and indirect costs of child-rearing could
therefore be replicated, but with information on these issues at
the level of individual households.
Budget studies have an important role to play. Despite their
essential arbitrariness, budgets such as those compiled by the
NSW Health Commission or by welfare agencies can be used at least
to invalidate the results derived by other means. That is, take
a derived set of relativities or a poverty line and see what can
be bought by different families for the money.
Perhaps the most important and valuable research that could be
carried out in Australia would be a survey like Townsend's study
of household resources and standards of living in the U.K. Such
a survey would collect much of the same information as a
household expenditure survey and could be used for estimating
equivalence scales in the same way.
In addition to the wide range of information that is collected in
a survey such as a HES, Townsend collected data not only on
employment and labour force status, but also on occupational
facilities, fringe benefits and quality of working life; not
only on current money income but also income-in-kind from friends
and relatives, the value and costs of personal social services,
the types and amounts of savings and other assets, and the level
of indebtedness. Townsend collected information on families'
style of living, including questions on frequency and length of
holidays, frequency of eating out or of having friends to meals,
types of meals usually eaten, additional spending at Christmas,
extent of smoking and betting, and whether children had birthday
parties or received pocket money. Qualitative information of
this sort could be an important input into the process of making
judgements about families' needs and their standards of living.
132
The complexity and cost of such a survey should not be under-

estimated. The problem of burden on respondents and consequently
of data quality would be significant. Even such a large scale
survey could not be expected to answer all the policy and
research questions of interest. The other avenues of research
that were suggested should be followed, and decisions about the
relativities to be used - perhaps, different relativities in
different circumstances - should reflect the full variety of
information available. There are, of course, no ultimate right
answers, since we are forced to make precise judgements about
situations that can never by precisely known or measured. Some
inequity is inevitable.
Research is part of policy-making, not an alternative to it. It

is not simply that more research will increase our understanding
of an area that is only of academic interest. Judgements about
the needs of different types of families and judgements of equity
within the social security system are unavoidable. These
judgements are made whenever people reach conclusions about the
extent of poverty or inequality in Australian society, and they
are being actively made by the structure of the social security
system. The living standards of millions of pensioner and
beneficiary families are being substantially determined by these
effective judgements. A better factual basis is therefore
essential. In this regard, the research required for the
derivation of equivalence scales, like the setting of a poverty
line, is a crucial part of the process of giving effect to
judgements about justice.
133
APPENDIX - ADDITIONAL TABLES

134 A.2
EQUIVALENCES IMPLICIT IN THE AUSTRALIAN INCOME SECURITY SYSTEM : COMPARISON OF
SELECTED FINANCIAL YEARS 1964/65 TO 1982/83 (INCLUDING FAMILY ALLOWANCE AND
TAX PROVISIONS)
1964-65 1968-69 1973-74 1976-77 1978-79 1982-83
UNEMPLOYMENT BENEFICIARY
Single persons:
16 or 17 years .16 .14 .57 .50 .41 .30
18 to 20 years .22 .19 .57 .60 .59 .47
21years and over .38 .34 .57 .60 .59 .47
with one child .47 .42 .70 .75 .71 .71
with two children .59 .52 .84 .93 .85 .83
with three children .72 .64 1.01 1.11 1.01 .98
Couples:
with no children .66 .58 1.00 1.00 1.00 1.00
with one child .75 .66 1.13 1.15 1.13 1.11
with two children .86 .76 1.27 1.33 1.27 1.22
with three children 1.00 .88 1.44 1.50 1.42 1.34
with four children 1.14 1.02 1.61 1.66 1.54 1.46
with five children 1.28 1.16 1.79 1.83 1.68 1.59
PENSIONER : RENTING
Single persons:
with no children .59 .64 .67 .67 .66 .67
with one child .87 .92 .90 .88 .82 .83
under 6 or invalid - - .95 .91 .85 .84
with two children .98 1.07 1.04 1.05 .97 .95
younger under 6 or invalid - - 1.09 1.08 1.00 .97
with three children 1.12 1.23 1.21 1.24 1.12 1.09
youngest under 6 or invalid - - 1.26 1.27 1.15 1.11
135
Couples:
with no children 1.05 1.08 1.10 1.07 1.06 1.07
with one child 1.14 1.20 1.23 1.22 1.18 1.18
with two children 1.25 1.35 1.37 1.40 1.32 1.31
PENSIONER : NOT RENTING
Single persons:
with no children .55 .56 .57 .60 .60 .60
with one child .82 .84 .80 .81 .76 .75
under 6 or invalid - - .85 .84 .79 .77
with two children .94 .99 .94 .98 .91 .88
younger under 6 or invalid .99 1.01 .94 .89
youngest under 6 or invalid .— — 1.16 1.20 1.09 1.04
Couples:
with no children 1.00 1.00 1.00 1.00 1.00 1.00
with one child 1.09 1.12 1.13 1.15 1.13 1.11
with two children 1.21 1.26 1.27 1.33 1.27 1.23
Sources: Australian Budget Statements and Department of Social Security Annual Reports
for relevant years; and Development Division, Department of Social Security, Research
Paper No. 20, Developments in Social Security, June 1983.
Equivalences are based on the net value of assistance for a pensioner couple with
no dependent children who are not paying rent.
136 A.2
EQUIVALENCES IMPLICIT IN AUSTRALIAN TAXATION SYSTEM - 1976-77 and 1983-84
Effective Tax 1/2 AWE AWE 2 AWE

Threshold
76-77 83-84 76-77 83-84 76-77 83-84 76-77 83-84
Single Person 0.61 0.62 0.89 0.91 0.94 0.95 0.96 0.97
Sole parent , one child 0.92 1.01 .01 .09 1.00 1.01 1.00 1.01
Sole parent , two children 0.98 1.07 .06 .20 1.04 1.04 1.02 1.02
Sole parent , three children 1.04 1.13 .13 .32 1.08 1.07 1.05 1.04
Sole parent , four children 1.11 1.19 .19 .44 1.12 1.10 1.07 1.06
Couple , one working, no children 1.00 1.00 .00 .00 1.00 1.00 1.00 1.00
Couple , one working, one child 1.04 1.13 .04 .12 1.02 1.03 1.01 1.02
Couple , one working , two children 1.09 1.18 .09 .23 1.06 1.05 1.03 1.03
Couple , one working, three children 1.16 1.24 .16 .35 1.10 1.08 1.06 1.05
Couple , one working, four children 1.23 1.31 .23 .46 1.14 1.11 1.08 1.07
Couple , both working, no children .21 1.25 .00 1.04 1.07 1.03 1.13 1.13
Couple , both working, one child .25 1.29 .04 1.15 1.10 1.05 1.14 1.14
Couple , both working, two children .31 1.34 .10 1.26 1.13 1.08 1.16 1.16
Couple , both working, three children .37 1.40 .16 1.37 1.17 1.11 1.19 1.18
Coupoe , both working, four children .44 1.47 .23 1.49 1.21 1.14 1.21 1.19
Notes: Derived from personal calculations. The equivalences for those at 50 per cent, 100 per cent and 200 per
cent AWE are those implicit in the after-tax incomes of families whose pre-tax income are at these
respective levels. It is assumed that for a couple where both work, the income is plit 60:40. Family
allowances are treated as a tax rebate.
137 A.3
Equivalence Ratios Implicit in International Family Allowance Programs in 1981
(a) Equivalences are based on the level of assistance for the first child in the family who qualifies for a payment.
(b) Universal programs are most often funded from general revenue.
(c) Some countries pay an age loading which varies with the age of the child assisted, and is added to the basic
payment. The value of these loadings relative to the value of the payments for the first child are represented
in diagram ( ), which should be read in conjunction with this table.
(d) Employment related programs are funded from employee and employer contributions, and are often limited to certain
industrial sectors.
SOURCES; SOCIAL SECURITY PROGRAMS THROUGHOUT THE WORLD 1981, U.S. Department of Health and Human Services, Research
Report 58, SSA 13-11805, July 1982. Quebec, BASIC ASSISTANCE REGULATIONS, January 15, 1981.
A.4
138
Age Loadings in International Family Allowance Programs in 1981
(a) Loadings are calculated as a proportion of the basic level of assistance for the
first qualified child of the family.
Source: See Table A.3

139
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DEVELOPMENT DIVISION: SERIES OF RESEARCH PAPERS
RESEARCH PAPER NO 1 UNEMPLOYMENT BENEFIT RECIPIENTS IN

AUSTRALIA. 1970-1980: AN ANALYSIS
(REVISED) (NOVEMBER 1981)
RESEARCH PAPER NO 2 REVIEW OF THE CHARACTERISTICS OF LONG-TERM

UNEMPLOYMENT BENEFIT RECIPIENTS IN
AUSTRALIA. 1970-1977 (NOVEMBER 1978)
RESEARCH PAPER NO 3 CHANGING FAMILY PATTERNS AND SOCIAL SECURITY

PROTECTION: THE AUSTRALIAN SCENE
(MARCH 1979)
RESEARCH PAPER NO 4 UNEMPLOYMENT STATISTICS IN AUSTRALIA

(JULY 1979)
RESEARCH PAPER NO 5 A REVIEW OF THE CHARACTERISTICS OF SOLE

PARENTS ASSISTED UNDER THE SOCIAL SERVICES
ACT (MARCH 1980)
RESEARCH PAPER NO 6 RESEARCH QUESTIONS ON INCOME SECURITY FOR

SOLE PARENTS (MARCH 1980)
RESEARCH PAPER NO 7 CHARACTERISTICS OF SOLE MOTHERS RECEIVING

STATE ASSISTANCE SUBSIDISED UNDER THE STATES
GRANTS (DESERTED WIVES) ACT (MARCH 1980)
RESEARCH PAPER NO 8 ADDITIONAL DATA REQUIREMENTS OF THE

DEPARTMENT OF SOCIAL SECURITY (APRIL 1980)
RESEARCH PAPER NO 9 THE RELATIONSHIP BETWEEN THE AUSTRALIAN

SOCIAL SECURITY AND PERSONAL INCOME TAXATION
SYSTEMS - A PRACTICAL EXAMINATION
(DECEMBER 1980)
RESEARCH PAPER NO 10 SURVEY OF INVALID PENSIONERS OCTOBER 1979:

DATA ON MAJOR CAUSES OF INVALIDITY AND ON
OTHER IMPAIRMENTS 2ND EDITION (OCTOBER 1981)
RESEARCH PAPER NO 11 THE FINANCE OF SOCIAL SECURITY: SOME

IMPLICATIONS OF THE INTERACTION BETWEEN
SOCIAL SECURITY AND PERSONAL INCOME TAX
(DECEMBER 1980)
RESEARCH PAPER NO 12 WORK INCENTIVE EXPERIMENTS IN THE UNITED

STATES AND CANADA (JUNE 1981)
RESEARCH PAPER NO 13 WORK TEST FAILURE - A SAMPLE SURVEY OF

TERMINATIONS OF UNEMPLOYMENT BENEFIT
(JUNE 1981)
RESEARCH PAPER NO 14 STATISTICS ON THE DISTRIBUTION OF INCOME AND

WEALTH IN AUSTRALIA (OCTOBER 1981)
RESEARCH PAPER NO 15 POPULATION PROJECTIONS AND SOCIAL SECURITY

(NOVEMBER 1981)
RESEARCH PAPER NO 16 AS HIS WIFE: SOCIAL SECURITY LAW AND POLICY

ON DE FACTO MARRIAGE (DECEMBER 1981)
RESEARCH PAPER NO 17 TAXATION EXPENDITURES: SUBMISSION BY THE
DEPARTMENT OF SOCIAL SECURITY TO THE INQUIRY
INTO TAXATION EXPENDITURES BY THE HOUSE OF
REPRESENTATIVES STANDING COMMITTEE ON
EXPENDITURE (MARCH 1982)
RESEARCH PAPER NO 18 SOLE PARENTS ON PENSIONS: A SAMPLE SURVEY

OF CLASS 'A' WIDOW PENSIONERS AND SUPPORTING
PARENT BENEFICIARIES (JUNE 1982)
RESEARCH PAPER NO 19 FINANCING SOCIAL SECURITY: AN ANALYSIS OF

THE CONTRIBUTORY 'SOCIAL INSURANCE' APPROACH
(JUNE 1982)
RESEARCH PAPER NO 20 DEVELOPMENTS IN SOCIAL SECURITY: A

COMPENDIUM OF LEGISLATIVE CHANGES SINCE 1908
(JUNE 1983)
RESEARCH PAPER NO 21 SURVEY OF MORBIDITY CHARACTERISTICS OF

CHILDREN RECEIVING HANDICAPPED CHILD'S
ALLOWANCE. 14 MARCH 1982 (DECEMBER 1983)
RESEARCH PAPER NO 22 SOME IMPLICATIONS OF THE INTERACTION OF THE

PERSONAL INCOME TAXATION AND SOCIAL SECURITY
SYSTEMS (MARCH 1984)
RESEARCH PAPER NO 23 PERMANENT INCAPACITY: INVALID PENSION IN

AUSTRALIA (APRIL 1984)
RESEARCH PAPER NO 24 GOVERNMENT SUPPORT OF RETIREMENT INCOMES IN

AUSTRALIA (APRIL 1984)
RESEARCH PAPER NO 25 THE ECONOMIC AND SOCIAL CIRCUMSTANCES OF THE

AGED (APRIL 1984)
RESEARCH PAPER NO 26 RETIREMENT INCOME PROVISIONS OVERSEAS

(APRIL 1984)
RESEARCH PAPER NO 27 A FAMILY'S NEEDS: EQUIVALENCE SCALES.

POVERTY AND SOCIAL SECURITY (APRIL 1985)
RESEARCH PAPER NO 28 EQUITY. TAX REFORM AND REDISTRIBUTION

(APRIL 1985)
RESEARCH PAPER NO 29 ISSUES IN ASSISTANCE FOR FAMILIES -

HORIZONTAL AND VERTICAL EQUITY
CONSIDERATIONS (AUGUST 1986)
RESEARCH PAPER NO 30 THE 'GREATEST ASSET SINCE CHILD ENDOWMENT'?:

A STUDY OF LOW-INCOME WORKING FAMILIES
RECEIVING FAMILY INCOME SUPPLEMENT
(NOVEMBER 1986)
RESEARCH PAPER NO 31 TRENDS IN THE DISPOSABLE INCOMES OF

AUSTRALIAN FAMILIES. 1964-65 TO 1985-86
(DECEMBER 1986)
RESEARCH PAPER NO 32 OVERSEAS COUNTRIES' MAINTENANCE PROVISIONS

(DECEMBER 1986)
RESEARCH PAPER NO 33 OVERSEAS COUNTRIES' ASSISTANCE TO SOLE

PARENTS (DECEMBER 1986)

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A family's needs:

Equivalence scales, poverty

Research Paper No. 27

The author of this paper is

Earlier versions of the paper

The issue of equivalence scales has been a concern of the

1.1 The concept of equivalent standards of living 1

2.1 Rowntree and the budgetary approach 7

3.1 Data sources 40

4.1 The individual welfare function of income 81

5.1 Some complications 89

TABLE OF CONTENTS (contd)

5.2 Comparing equivalence scales 102

No. Title Page

2.8 Components of the Townsend deprivation

2.9 Townsend equivalence scales for

3.2 Equivalence scales using the "Canadian"

3.3 Detailed equivalence scales using

3.4 Equivalence scales from the "Canadian"

No. Title Page

3.5 Equivalence scales using the

3.6 Further various examples of

3.7 Equivalence scales using the

3.8 'Prais-Houthakker equivalence scales'

3.9 'Prais-Houthakker equivalence scales'

3.10 McClements equivalence scales -

3.11 Provisional equivalence scales

3.12 Various equivalence scales adapted

3.13 General equivalence scales using

3.14 Equivalence scales with age

3.15 Pre-committed expenditures ($p.w.)

3.17 Equivalence scales using the ELES

3.18 Basic equivalence scales using the

3.19 Detailed equivalence scales using

3.20 Lazear - Michael equivalence scales

3.21 Detailed equivalence scales using

4.1 Estimated equivalence scales from

4.2 Detailed equivalence scales from

5.1 Comparison between various

5.2 Geometric means derived from

5.4 Detailed equivalence scale estimates

5.5 The costs of working - estimates of

5.6 Working and dependent spouses -

A.I Equivalences implicit in the

A. 2 Equivalences implicit in the Australian

A. 3 Equivalences implicit in international

A. 4 Age loadings in international family

1.1 The concept of equivalent standards of living

A number of problems in social policy require a method for

Equivalence scales (or ratios) attempt to take account of these

(2) The choice of the benchmark family can have an important

(3) For a discussion of the CPI, see Australian Bureau of

There are further methods of determining equivalence scales that

The paper then discusses the results of all these estimation

2.1 Rowntree and the budgetary approach

(4) For a review of approaches to the definition and

Table 2.1 : R o w n t r e e ' s equivalence scales - York, 1936

Employed Unemployed Age Pensioner

Single man 0.81 (0.93) 0.71 (0.82) 0.48 ( 0 . 5 5 )

Notable features of these scales include the significant

The severity of the scale derived in this way is illustrated by

(5) For detailed criticisms of the Henderson poverty line, see

Main Reports of the Commission of Inquiry into Poverty. The more