1. Issues in the Use of Equivalence Scales - comments Lars Osberg Economics Department, Dalhousie University Workshop on Low Income, Poverty and Deprivation Statistics Canada, Ottawa February 12, 2007

2. When might the choice of equivalence scale matter? Percentage distribution of households, by number in household Number in Household 12345678 All Canada Households >65 Households <65 Single Parent Hhlds Immigrant Head Visible Minority Aboriginal Ontario Quebec Newfoundland

3. How much does choice of equivalence scale matter for empirically relevant family sizes? Number of Equivalent Adults according to Family Size equivalence scales familyLISStatisticsOECD sizeβ = 0.5Canada 2 adults+(n- 2)kidsβ = 0.3β = 0.7 β = 1 1111111 21.4 1.71.21.62 31.7 2.21.42.23 4222.71.52.64 52.22.33.21.63.15 62.42.63.71.73.56 72.62.94.21.83.97 82.83.24.71.94.38 933.55.21.94.79 103.23.85.72510

6. Why is it only size that matters? Poverty index P defined over frequency distribution of resources R and household characteristics C  P = p( f ( R*)) R* = effective resources | characteristics = r (C)  P = p( f (well-being)) u = u (R, C) In principle, many characteristics may matter Household characteristics C = X + Y + Z  X – ethically irrelevant Do not matter for measurement because do not matter for policy  Y – empirically irrelevant for measurement of level of poverty May be highly relevant for program delivery  Z – relevant for poverty measurement N = number household members not only relevant characteristic

7. Ethically irrelevant characteristics Not all characteristics that may be empirically important as determinants of a household’s cost of living should be considered in poverty measurement  Policy implications unpalatable Examples:  Gender Clothing costs inequality?  Religion Dietary rules? Cost of private schooling? Cost of religious prohibitions on particular activities?

8. Empirically irrelevant characteristics Not all empirically important determinants of cost of living need to be considered in poverty measurement Example:  Gender mix of children - huge impact on cost of living HRDC Market Basket for 2 Adult 2 Child family  2.5 Bedroom Apartment – 50% probability of same sex Issue: E ( p( f( R, Y, Z))) = E ( p (f ( R, Z)))  Is Y randomly distributed w.r.t Z ?  Type 1 = Type 2 error  OK for Statistics Canada to ignore Y but program administrators need to know

9. More than size matters! – for measurement and analysis Current LICO measurement practice  Number of household members Intended as adjustment for quantity of needs  Size of urban area Intended as adjustment for price level of needs But if ethically relevant needs vary by other household characteristics (Z) – analysis will mislead Disability  Empirically important as both cost of living determinant – wheelchairs cost $$$ policy analysis variable – increase probability low income Age of children ?Frail elderly ? Survey evidence needed on Canadians views on ethically appropriate differentials in household need