ESRI Working Paper

How important are the unit of analysis and equivalence scales when measuring income poverty and inequality? Evidence from Ireland

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March 10, 2022
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We analyse the effect of varying equivalization scales and income-sharing units (households, tax-units and benefit-units) on inequality and poverty statistics using Irish microdata. We find that benchmark equivalence scales result in substantial variation in the degree of income poverty estimated at the household level, particularly for young children and the elderly. We test multiple permutations of child and adult weights in a set of hypothetical equivalence scales. Our simulation results show that over a range of commonly observed adult-child equivalence weights –0.5 to 0.7 for adults and 0.3 to 0.5 for children, Irish income poverty rates in 2019 ranged from 15.0 per cent to 19.5 per cent– most of this variation is attributable to changes in the adult weight. Inequality statistics tend to be less sensitive to the choice of equivalence scale but are sensitive to the choice of income-sharing unit. At the household level, the Gini coefficient varies between 0.29 and 0.32. At the tax-/benefit-unit level the range is elevated, with the Gini remaining stable over time but between 0.33 and 0.35. Other inequality metrics, such as the p90p10 ratio, exhibit increased volatility over the business cycle at sub-household unit levels.