Most official income and poverty measures use household income as a proxy for standard of living. However, households of different sizes and compositions require a different level of income to achieve the same standard of living. For example, a one adult household clearly does not require as much income as a two adult household in order to attain an equivalent standard of living, but the income required would not be half that of the two adult household.
Because of this, an adjustment, known as equivalisation, is made to household incomes which attempts to account for the different needs of different sized households. Equivalised household income is designed to be comparable across households of different sizes.
Equivalence scales conventionally take an adult couple without children as the reference point, with an equivalence value of one. The process then increases relatively the income of single person households (since their incomes are divided by a value of less than one) and reduces relatively the incomes of households with three or more persons, which have an equivalence value of greater than one.
Consider a single person, a couple with no children, and a couple with two children aged fourteen and ten, all having unadjusted weekly household incomes of £200 (Before Housing Costs). The process of equivalisation, as conducted in HBAI, gives an equivalised income of £299 to the single person, £200 to the couple with no children, but only £131 to the couple with children.
The equivalence scales used here are the modified OECD scales. Two separate scales are used, one for income Before Housing Costs (BHC) and one for income After Housing Costs (AHC). Modified OECD rescaled to a couple without children is as follows:
|Children aged under 14 years||0.20||0.20|
|Children aged 14 years and over||0.33||0.42|
The construction of household equivalence values from these scales is quite straightforward. For example, the BHC equivalence value for a household containing a couple with a fourteen year old and a ten year old child together with one other adult would be 1.86 from the sum of the scale values:
0.67 + 0.33 + 0.33 + 0.33 + 0.20 = 1.86
This is made up of 0.67 for the first adult, 0.33 for their spouse, the other adult and the fourteen year old child and 0.20 for the ten year old child. The total income for the household would then be divided by 1.86 in order to arrive at the measure of equivalised household income used in HBAI analysis.
There are a number of different equivalence scales which can be used to equivalise household incomes. Since 2007 UK and Scottish Government official poverty estimates have been based on the modified OECD scale.
The following paper discusses some common equivalence scales and issues around some of the underlying assumptions of the equivalisation process:
The Households Below Average Income publication by DWP provides further details on the equivalisation methodology.