Between a Rock and Hard Place: Equivalence Scales and Inter-Household Welfare Comparisons

Bryan Perry

The problem of deciding on an adequate welfare expenditure level for vastly differing types of households has led to the development and use of household equivalence scales. On the one hand, a simple per capita scale overestimates how much income is required for larger families compared to smaller ones, but treating all households the same (“no scale”) does just the opposite. Something in between is needed to allow a realistic adjustment of expenditure to needs.

This paper discusses some of the challenges involved in exploring this “in between” territory. I survey a range of scales, giving contemporary examples, then develop a formal framework in which to set the various types of scale estimation methods. I then examine the major difficulties for one of these, the full utility function. Having identified the dilemma (policy and research need scales, but there seems to be no independent means of deciding which one is “best”), the principle of “using informed judgement to choose a plausible scale” is used in relation to the Jensen 1978 and 1988 scales.