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

We analyse the effect of varying equivalization scales and income-sharing units on inequality and poverty statistics using Irish microdata. We find that benchmark equivalization scales result in substantial variation in the degree of income poverty estimated at the household level, particularly for young children, the elderly, along with households comprised of one adult or more than two adults. 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 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. Other inequality metrics, such as the p90p10 ratio, exhibit increased volatility over the business cycle at sub-household unit levels.