Policy Research Paper No 27

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A family's needs:Equivalence scales, poverty

and social security

Research Paper No. 27Development DivisionDepartment of Social SecurityApril 1985


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EQUIVALENCE SCALES, POVERTY AND SOCIAL SECURITY

The author of this paper isPeter Whiteford of theDevelopment Division,Department of Social Security.

Earlier versions of the paperwere presented at the 53rdANZ AAS Congress in Perth inMay 1983 and at the SocialWelfare Research Centre in

September 1983.

A FAMILY'S NEEDS :


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ISBN 0 642 51588 3 C. J. THOMPSON, Commonwealth Government Printer


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(i)

Acknowledgements

The issue of equivalence scales has been a concern of theDepartment of Social Security for some time. This paper buildson previous work by past and present members of the Development

Division, particularly David Ingles, David Stanton and CherylHammond. Research assistance was provided by Andrew Stuart. Ihave particularly benefited from comments provided by AndrewBurbidge, 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 commentsreceived from other officers of the Development Division.However, I alone am responsible for any errors. The viewsexpressed are my own.


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(ii)

TABLE OF CONTENTS

AcknowledgementsTableList

1.

1.11.21.3

2.

2.12.2.2.32.42.5

2.62.7

3.

3.13.2

3.33.43.53.63.73.83.9

4.

4.14.2

5.

5.1

of Contentsof Tables

INTRODUCTION

The concept of equivalent standards of livingThe uses of equivalence scalesOutline of the paper

EQUIVALENCE SCALES AND POVERTY RESEARCH

Rowntree and the budgetary approachThe Henderson relativitiesThe cost of a child - a modern minimumAppraisal of the budgetary approachRelative measures of poverty and relativefamily needs

Townsend and relative deprivationConclusion - poverty measurement and equivalence

THEORIES OF CONSUMER BEHAVIOUR IN ECONOMICS

Data sources

Engel's law and the proportional approach

The Engel modelThe Prais-Houthakker methodIdentification and other mathematical problemsUtility theoryThe Barten methodThe extended linear expenditure system (ELES)Appraisal of the Barten and ELES models

THE ATTITUDINAL APPROACH

The individual welfare function of incomeAppraisal of the attitudinal approach

CONCLUSION

Some complications

The different approaches and the roleof value judgements

Private choice and public support

Gross and net costsEconomies of scaleThe new theory of consumer behaviourMoney and other resourcesThe unit of analysis

The time period

PAGE

(i)(ii)(iv)

145

79

1216

202638

4044

53545564697274

8185

89

89919394949799

100


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(iii)

TABLE OF CONTENTS (contd)

5.2 Comparing equivalence scales

General resultsThe costs of children

The costs of workingOne-earner and two-earner families

5.3 Equivalence scales and poverty measurement

5.4 Objectivity, values and needs5.5 An equivalence scale for Australia?

APPENDIX - Additional Tables

BIBLIOGRAPHY

PAGE

102

102110110113

114119128

133

139


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(iv)

LIST OF TABLES

No.

2.1

2.2

2.3

2.4

2.5

2.6

2.7

2.8

2.9

3.1

3.2

3.3

3.4

Title

Rowntree's equivalence scales

- York, 1936

Henderson standard costs

Henderson relativities for selectedfamily compositions - New York, 1954

Comparison of relativities implicitin Supplementary Benefit scale ratesand Piachaud's estimates of the costof children - United Kingdom, 1979-80

Comparison of relativities implicitin pension rates and Lovering 'sestimates of the cost of children -Australia, May 1983

Equivalence scales implicit in netincomes of different types of incomeunits by principal source of income- Australia, 1978-79

Equivalence scales implicit in thedistribution of average householdexpenditures by household composition

and household income - Australia,1974-75

Components of the Townsend deprivationindex

Townsend equivalence scales forselected household types - UnitedKingdom, 1968-69

Equivalence scales for Canada usingthe proportional approach - 1959-

1969

Equivalence scales using the "Canadian"approach - Australia, 1974-75

Detailed equivalence scales usingthe "Canadian" approach - Australia,1974-75

Equivalence scales from the "Canadian"approach for two adult householdswhere the head works and the spousedoes not - Australia, 1974-75

Page

8

11

13

15

16

23

25

30

32

46

47

48

48


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No.

3.5

3.6

3.7

3.8

3.9

3.10

3.11

3.12

3.13

3.14

3.15

3.16

3.17

3.18

3.19

(v)

Title

Equivalence scales using theproportional approach - United States,1960

Further various examples ofequivalence scales using theproportional approach

Equivalence scales using theproportional approach - Israel,1968-69

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

'Prais-Houthakker equivalence scales'as estimated by Podder - Australia,1966-68

McClements equivalence scales -United Kingdom, 1971-72

Provisional equivalence scalesderived from the Jensen equivalenceformula

Various equivalence scales adapted

from Prais-Houthakker model

General equivalence scales usingthe Barten model - United Kingdom,1975

Equivalence scales with agedifferences using the Barten model -United Kingdom, 1975

Pre-committed expenditures ($p.w.)for selected groups - Australia,

1975-76

Pre-committed expenditures ($p.a.)- Australia, 1967

Equivalence scales using the ELESmethod - Australia, 1967

Basic equivalence scales using theELES method - Australia, 1974-75

Detailed equivalence scales usingthe ELES method - Australia, 1974-75

Page

49

50

51

57

58

59

60

63

71

71

73

74

75

76

77


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No.

3.20

3.21

4.1

4.2

5.1

5.2

5.3

5.4

5.5

5.6

5.1

A.I

A. 2

A. 3

A.4

(vi)

Title

Lazear - Michael equivalence scales

- United States, 1960-61

Detailed equivalence scales using

the ELES method - United States,1960-61

Estimated equivalence scales from

the attitudinal approach -Netherlands, 1975

Detailed equivalence scales fromthe attitudinal approach -

Netherlands, 1971

Comparison between various

equivalence scales

Geometric means derived from

equivalence scale research

O.E.C.D. equivalence scales

Detailed equivalence scale estimatesof the costs of children by age

The costs of working - estimates ofthe percentage increase in income

required to maintain equivalent

standard of living when householdhead works

Working and dependent spouses -percentage increase in income

required to maintain equivalentstandard of living when spouse works

Estimates of trends in poverty inAustralia by equivalence scales used

Equivalences implicit in the

Australian social security system:Comparison of selected years1964/65 to 1983/84 and November1984

Equivalences implicit in the Australianincome taxation system - 1976-77 and1983-84

Equivalences implicit in internationalfamily allowance programs - 1981

Age loadings in international family

allowance programs - 1981

Page

77

78

83

84

106-107

109

109

111

112

114

116

134-135

136

137

138


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1 . INTRODUCTION

1.1 The concept of equivalent standards of living

A number of problems in social policy require a method forcomparing the standards of living of different family orhousehold 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 oftaxation allowances, maintenance payments, housing commission

rents or child care fees, and in deciding on priorities foradditional assistance in all these areas, it is necessary to takeinto 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 bydifferent types of families to attain a similar standard ofliving. Equivalence scales are usually expressed as a set ofnumbers; some arbitrarily chosen family or household type istaken as the base and its value is set equal to 1.0. Otherfamily types are then expressed as proportions of this base. For

example, if the benchmark is taken to be a married couple withoutchildren (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 asthey are. Similarly, if the figure for a couple with twodependent children is 1.24, then they need 124 per cent of theincome of a couple without children to attain the same level of

well-being. This also implies that married couples with nochildren 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 twochildren and an income of $12,000 per year, say, would have amoney income twice that of a single person with $6,000 per year,their effective income (relative to their needs) would actuallybe less than that of such an individual. That is, such a familycould actually be poorer than an individual with less than halftheir money income.

(1) The terms "family" and "household" are used loosely. The

unit of concern is generally the income unit for socialsecurity purposes.

(2) The choice of the benchmark family can have an importanteffect on some of the practical applications of equivalencescales. The couple without children is chosen in this paperbecause it allows the effects of adding children to beeasily seen. The wider implications of choosing a couple asthe benchmark are discussed in Section 5.1.


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Different aspects of families' circumstances are relevant todiffering areas of policy concern. For example, in analysingsocial security and welfare policies, a family's "needs" arerelevant; 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 needare closely related, but not identical. The concept that is mostcomprehensive and has the widest application is that of "standardof living".

What is meant by a family's standard of living, and what isunderstood when standards of living are compared? It is possibleto say what standard of living does not mean. The concept ofstandard of living can be distinguished from other related ideassuch as quality of life, happiness, utility or personalsatisfaction. For example, individuals such as alcoholics may be

described as maximising utility at considerable cost to theirstandard of living. Similarly a person may change jobs toincrease his or her quality of life, and at the same time be onlyable to achieve a lower standard of living. Children may be asource of happiness to families, but they can cause a loweredstandard of living.

More positively, according to McClements, "living standardsdescribe the material well-being of the household or family unitas perceived by it and society as a whole rather than personalhappiness per se " (1978, p.36). Jensen's definition is similar -he concludes that it is apparent that the "standard of living ofa household is not an objectively defined function of its level

of consumption, rather (it) is specified by the general consensusamongst members of the society about what the household1s patternof consumption is judged to represent in terms of material well-being" (1978, p. 5).

While there is a fair degree of agreement on broad definitionssuch as those of McClements and Jensen, there has beeninconsistency in the way such definitions have been used inpractice. For example, while the definitions cited above (andmany others) point out that two important, formal elements in afamily's standard of living are its own subjective judgementabout its situation and the way or ways in which the general

community ranks standards of living, in practice a family'sstandard of living is usually treated as being determined by thetypes and quantities of goods and services it consumes.

The fundamental problem, however, is that a person's standard ofliving is itself a concept and, like other concepts such as needor poverty, utility or welfare, it is an abstraction that cannotbe directly observed. Yet many people commonly make judgementsabout their own or others' standards of living and in makingthose judgements refer to social conditions and personalsituations that are real and observable. Living standards shouldbe 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


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way of comparing different families is on the basis of familysize, i.e. assume that a family of four requires four times theincome 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 offood as an adult, the clothing or transport costs of individualsmay differ if they are working or retired. The per capitaapproach also does not take account of economies of scale withincreasing family size - two adults may spend twice as much onfood or clothing as one, but the cost of housing usually does notdouble for two. The needs of families may also differ with theage of adults, their position in the family life cycle or theirasset holdings - for example, a retired couple who own their ownhome may have a very different living standard from a youngcouple, 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, assetholdings, economies of scale - and also any other factors thatdetermine families' patterns of consumption of goods and servicesas a pre-requisite to comparing the standards of living ofdifferent family units. Determining the right way of balancingthese factors is not an easy task. The problem is preciselycomparable to that involved in the development of an index of thecost of living. It is not an exaggeration to say thatequivalence scales can have as much practical importance as doesthe Consumer Price Index (CPI).(3)

(3) For a discussion of the CPI, see Australian Bureau ofStatistics, A Guide to the Consumer Price Index, (Cat No6440.0). Deaton and Muellbauer (1980, pp. 169-190) discusstrue indexes of the cost of living.


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1.2 The uses of equivalence scales

This discussion points to a number of important uses forequivalence scales. As Cox (1982, p.22) notes:

Related to the concept of an equivalence scale is that of anequivalent income distribution which is calculated bydividing families' or households' incomes by the relevantequivalence scale value. By considering incomes in relationto needs this procedure ranks them on a single scale. Tothe extent that income is an accurate measure of financialresources it seems reasonable to suggest that those with lowequivalent incomes are likely to have the greatestdifficulty in making ends meet (and therefore may be most inneed of extra government assistance); those with greaterequivalent incomes are likely to have fewer difficulties.

In fact, any analysis of statistics on the distribution of incomemust either explicitly or implicitly involve the use ofequivalence scales. If equivalence scales are not explicitlyused, then effectively the analysis simply assumes that allfamilies at a certain income level achieve the same standard ofliving, irrespective of the size or characteristics of thefamily. Thus, in poverty research, it is not possible to avoidmaking judgements about the relative needs of families.

Equivalence scales are also implicit in the structures of thesocial security and personal income taxation systems. Inevaluating these systems or proposals to change them, judgements

about needs or ability to pay must be made. Equivalence scalescan also be used in answering more specific policy questions, forexample:

What benefit should be paid for a child relative tothat for an adult?

How much should a single person receive relative to amarried couple?

Should a person living alone receive the same benefitas a person sharing accommodation with others?

What are the additional costs associated withdisability or with looking for work?

How do the housing costs of renters differ from thoseof persons who own or are buying their homes?

How do costs vary with the age of children or with thelocation of the family?


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1. 3 Outline of the Paper

This paper is not intended to answer all these substantivequestions. Rather it provides an overview of the major issues

and problems involved in research into the derivation ofequivalence scales, with particular emphasis on their applicationin the area of income security research and policy.

There have recently been some notable Australian contributions tothe literature on equivalence scales. These have been the SocialWelfare Policy Secretariat's (SWPS) Report on PovertyMeasurement (1981), the accompanying paper prepared by theAustralian Bureau of Statistics (ABS) on the estimation ofequivalence scales for Australia from Household ExpenditureSurvey (HES ) data, and a subsequent paper by Jim Cox, presentedat the Social Policy Conference in Canberra in May 1982, and

published as "Equivalent Income Distributions" in the SocialSecurity Journal (December 1982). This paper goes over some ofthe same ground, and attempts to put these recent works in thebroader perspective of the tradition of writings on equivalencescales. The present paper surveys the field in some depth, butbecause it is intended to be of use to interested non-experts, itdoes not deal in a mathematically rigorous way with many of theissues raised, except to the extent that some of the issuescannot be fully appreciated without some technical backgrounddetail.

The paper commences with a discussion of some of the ways inwhich various researchers have dealt with the definition and

measurement of a family's standard of living. There are a numberof alternatives. One approach is to define a 'basket of goods'or a budget which will allow different families to achieve aspecified standard of living (for example, a poverty standard ora "modest but adequate" standard of living). The costs of thesebudgets for different types of families provide the scale ofequivalence. This method has often been used in povertyresearch, for example, by Rowntree (1901, 1942). The scalesdeveloped by Beveridge (1942) and the poverty lines usedofficially in the United States (Orshansky, 1965, 1969, 1975) arefurther examples of this approach. The scales used by theCommission 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 afamily should consume or how it should behave. The paperprovides an extensive discussion of the poverty literature, as itis in this context that much of the interest in equivalencescales has arisen.

The contrasting approach is to estimate scales from surveys ofthe actual expenditure behaviour of households. The paperdiscusses the assumptions and methodology of a number of examplesof this approach; specifically, the 'Canadian' method and theapplication 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


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estimation procedure by Muellbauer (Barten,1964; Muellbauer,1980); and the Extended Linear Expenditure System (ELES) asapplied 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. Aswith the literature derived from poverty research, the economicstudies can be described as constituting a tradition, wheresuccessive research has attempted to resolve or to by-pass theconceptual, technical or measurement problems of previousresearch.

There are further methods of determining equivalence scales thatdo not directly belong to either of these major traditions. Thepaper discusses two approaches that have recently been prominent- the equivalence scales developed by Peter Townsend in his studyof Poverty in the United Kingdom (1979), and the "attitudinalscales", derived by directly questioning people about the income

required to keep them out of poverty or to give them a reasonablestandard of living. However, while Townsend's scales are notderived from the "basket of goods" or budget approach, his surveydoes belong to the tradition of poverty research, and istherefore discussed in that section.

The paper then discusses the results of all these estimationprocedures and compares them with the relativities implicit inthe Australian social security system and those in a number ofother countries. The paper concludes with a discussion of theusefulness of various scales, the practical importance ofdetermining that a particular scale is appropriate for

application, and the conflicting factors that need to be takeninto account in policy considerations.


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2. EQUIVALENCE SCALES AND POVERTY RESEARCH (4)

2.1 Rowntree and the budgetary approach

Rowntree's survey of York in 1899, published in 1901 asPoverty; A Study of Town Life, is one of the first major workson the determination of the relative needs of low incomefamilies. Rowntree essentially tried to find the minimum cost of

maintaining a family at a subsistence standard of living. Heestablished his poverty line by drawing up a list of necessitiesunder the headings of food, clothing, fuel and householdsundries, and then estimated how much it would cost to buy them.In Rowntree's original study, the food allowance was based on thecost of standard diets required by low income families asspecified by nutritional experts. The estimates for clothing,fuel and rent were based on actual working-class expenditure inYork.

Rowntree's second study of York in 1935-36 proceeded along

similar lines to those used in the 1899 survey. Rowntreeestimated that an urban family of man, wife and three dependentchildren required an income of 53 shillings per week "to securethe necessaries of a healthy life" (1942, p. 28). It appears

that this figure happened to be the same as the minimum wagecustomarily paid to an adult male in York's main industry, themanufacture of cocoa, chocolate and general confectionery (p.9). After excluding rent (9 shillings 6 pence), the remainderwas allocated as follows: food, 47 per cent; clothing, 18 percent; fuel and light, 10 per cent; household sundries, 4 percent; 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 eachof these categories was calculated separately. For example, thesum allowed for food was based on the report of a committeeappointed in 1933 by the British Medical Association "todetermine the minimum weekly expenditure on food stuffs whichmust be incurred by families of varying size if health andworking capacity are to be maintained" (1942, p. 29). Theamounts Rowntree allowed for other categories of expenditure werebased either on his own and others' opinions or, as in the caseof clothing, on the actual expenditure of those among a smallgroup of families who spent the least.

In order to determine the amounts required for different types offamilies, and thus the equivalence scales, Rowntree undertookwhat he termed "a careful examination of the families' realneeds" (p. 31). For example, the costs of an unemployed man weredetermined by subtracting health and unemployment insurancecontributions, trade union subscriptions and the costs oftravelling from the budget for an employed man. The results ofthese calculations are shown in Table 2.1.

(4) For a review of approaches to the definition andmeasurement of poverty, see Stanton (1973). SWPS (1981,pp. 18-61) also discusses various concepts of poverty.


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Table 2.1 : Rowntree's equivalence scales - York, 1936

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 acouple with an unemployed head is taken as the base.

SOURCE: Rowntree, 1942, p. 30.

Notable features of these scales include the significantdifferences between the costs of males and females, and the largedifferences between the allowance for age pensioners and thosefor younger families, given that housing costs are not includedfor any unit. The results also show striking economies of scale- for a couple with an employed head, the first child adds 20 percent, 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 greaterrelative cost of children in families with an unemployed head

compared to the relative costs of children in families with anemployed head. For example, one child adds 20 per cent to theexpenditures of an employed family and 27 per cent to the costsof an unemployed family. But unemployed families show evengreater economies of scale in moving to higher numbers ofchildren than do employed families. This somewhat contradictoryresult probably reflects the essentially ad hoc way in whichRowntree adjusted his scales to exclude the costs of working.

The severity of the scale derived in this way is illustrated byRowntree's original description of the standard of living ofthose living on the poverty line in 1899:

A family living upon the scale allowed for in this estimatemust never spend a penny on railway fare or omnibus. Theymust never go into the country unless they walk. They mustnever purchase a halfpenny newspaper or spend a penny to buya ticket for a popular concert. They must write no lettersto absent children, for they cannot afford to pay thepostage. They must never contribute anything to theirchurch or chapel, or give any help to a neighbour whichcosts them money. They cannot save, nor can they join sickclub or trade union, because they cannot pay the necessarysubscriptions. The children must have no pocket-money fordolls, marbles, or sweets. The father must smoke no tobacco

nor drink beer. The mother must never buy any pretty

Employed

Single manSingle womanCoupleCouple and one childCouple and two childrenCouple and three children

0.81 (0.93)0.67 (0.77)1.00 (1.15)1.20 (1.38)1.30 (1.49)1.37 (1.57)

Unemployed

0.71 (0.82)0.55 (0.63)0.87 (1.00)1.10 (1.27)1.22 (1.40)1.27 (1.46)

Age Pensioner

0.48 (0.55)0.39 (0.45)0.70 (0.81)-

8


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clothes for herself or for her children, the character ofthe family wardrobe, as for the family diet, being governedby the regulation: 'Nothing must be bought but that which isabsolutely necessary for the maintenance of physical health,

and what is bought must be of the plainest and mosteconomical description'. Should a child fall ill, it mustbe attended by the parish doctor; should it die, it mustbe buried by the parish. Finally the wage-earner must neverbe absent from his work for one day. (1901, pp. 133-134)

This quotation also amply illustrates the many small factors thatare involved in judgements about the adequacy of a family'sstandard of living, and by implication the many areas ofjudgement that could be involved in deriving equivalence scalesfrom budget studies. At the same time this quotation expressesthe realities of poverty, real not simply because it is a severeor austere standard with which no one can argue, but real because

it expresses the details of life of the poor and providesinformation from which more informed judgements about theirstandard of living can be made.

2.2 The Henderson relativities

The first detailed survey of poverty in Australia was undertakenby the Institute of Applied Economic and Social Research at theUniversity of Melbourne in 1966, and the results were firstpublished in The Economic Record (Harper, 1967) and later in moredetail 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 standardfamily of a man in work, wife at home and two children had in1966 an income that was below the basic wage plus childendowment, they would be likely to be in poverty. Thus, therounded poverty line of $33 per week for such a family wasderived without any study of the actual needs and costs ofAustralian families. (5)

Henderson, Harcourt and Harper then used the 1954 "Family BudgetStandard", prepared by the Budget Standard Service of theCommunity Council of Greater New York to adjust their povertyline for differing family structures. The Family Budget Standardattempted to reflect for New York a "modest but adequate" level

of living based partly on expenditure studies, and partly on whatwere judged to be scientific requirements for good nutrition andhealth. These were used to formulate a regimen appropriate tofamilies in low to moderate income groups. Because of thecomplexity of the 1954 data (it not only allowed for the numberof adults and children in the family unit, but also for age, sex,and workforce status of family members, and whether the headlived alone or with other people), Professor Henderson used asimplified version of these relativities in the Interim and First

(5) For detailed criticisms of the Henderson poverty line, seeStanton (1980) and P. Saunders (1980). Manning (1982)provides a defence of the use of the Henderson line.


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10

Main Reports of the Commission of Inquiry into Poverty. The morecomplex standard cost assumptions were used to compute thenumbers and percentages below the poverty line. The only changewas that for costs varying with household size (housing, fuel,

power costs, etc), the series was smoothed to eliminateirregularities and anomalies (for example, rental costs in the1954 data were less for two persons than for one).

In deriving his simplified system of relativities, Hendersonaggregated the 1954 New York standard costs into five classes ofindividuals: working head; non-working head; working wife;non-working wife; and dependent children. He did this bycalculating simple averages for all classes except dependentchildren. For these he calculated a weighted average to avoidthe upward bias which the significantly higher standard costs forthe 15 and over age groups would give to a simple average.Table 2.2 illustrates the standard costs used in the adjustmentof 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 suchas food, clothing, education, recreation and transport, that varyaccording to the characteristics of the individual. Second,there are the housing and other costs like power, light andfurniture that depend on the total size of the household. Inorder to calculate the costs of different types of income units,the appropriate costs for individuals (head, wife and anychildren) are taken from Part A and added to the appropriatehousing and other costs from Part B. In the case of income units

sharing a household with others, the housing and other costs aretaken as a fraction of the costs of the appropriate totalhousehold size, the fraction being the ratio of the number ofpersons in the income unit to the total number of persons in thehousehold.

The standard costs assumptions shown in Table 2.2 have manyinteresting features. It can be seen from Part A that the costsfor each person are generally higher for males than for females,higher for those working than those at home, and higher for thoseliving 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 inPart B show quite marked economies of scale, e.g. housing for atwelve-person household costs only twice as much as housing for aone-person household. This table shows a number of apparentanomalies - for example, a working female single parent hasslightly lower food and clothing costs than a working wife ifthey are both under 40 years of age, but higher costs if they areover 40 years of age; a 65 year old working male who lives alonehas higher food and clothing costs than a similar female, but ifsuch persons share accommodation with others, then the female hashigher costs than the male. The housing costs in Part B varyonly with household size, not by type of individual or incomeunit. This implies that the housing costs of a mother with an

infant are the same as those of two unrelated adults or that fiveadults have the same housing costs as a couple with threechildren. These unexplained patterns perhaps reflect a danger ofthis very detailed approach to the determination of equivalence


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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

Employmentstatus

MalesFemales

Works

20. 8020.40

At home

14.8012.75

Works

20. 3020.15

At home

14. 3012.50

Works

20.0019.85

At home

12. 9510.85

(ii) Where income unit head lives with other people

Age

Employmentstatus

MalesFemales

Under

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Policy Research Paper No 27