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Two Scales, One Methodology - Expenditure Based Equivalence Scales for the United States and Germany

By Joachim Merz, Thesia Garner, Timothy M. Smeeding, Jürgen Faik and David Johnson

Abstract

Choosing an appropriate equivalence scale is a prerequisite for comparisons of economic wellbeing income distribution, inequality or poverty. This is true for country specific work or for cross-national comparisons. Researchers generally either use a country specific equivalence scale (social assistance, expert based, or poverty scales), or adopt a single scale for all comparison across countries. Here we follow a different approach. We use microdata to estimate equivalence scales based on a revealed preference consumption approach for West Germany and the United States. We review several approaches and rely on a complete demand system approach, which provides constant utility based equivalence scales using an extended linear expenditure system (ELES). The multiple equation expenditure system takes into account a full market basket with all its interdependencies and relative prices. Our consumption-based equivalence results are compared to alternative consumption based measures, expert based measures, and subjective based measures in use in both countries and to other scales used for cross-national comparisons.alternative equivalence scale, Germany, USA, distribution of income, inequality, poverty

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