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Estimating Extended Income Equivalence Scales from Income Satisfaction and Time Use Data

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Abstract

In this paper, I estimate extended income equivalence scales from income satisfaction and time-use data contained in the German Socio-Economic Panel. Designed to capture the needs of additional household members, these scales account for both, increases in households’ money income and domestic production requirements. The estimation procedure determines equivalence weights in these two components separately by combing the subjective with the objective approach. The findings suggest greater monetary equivalence weights for adults than for children, whereas household production increases more strongly in the number of children than in the presence of an adult partner. Differences in relative needs tend to balance out in the extended income equivalence scale, assigning additional adults and children almost identical weights of about 45%. I illustrate the implications of these estimates for measures of income inequality using the same dataset.

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Notes

  1. There are many more explanations for differential material living standards at equal monetary incomes; e.g. different wealth levels or household savings, differences in public goods provision, in vivo transfers etc. These are, however, at the outside of the present paper’s research focus.

  2. To date, the application of time-use equivalence scales to welfare comparisons based on extended or full incomes has been restricted to studies that are primarily concerned with the estimation/establishment of these scales.

  3. For a comparative review of the two empirical approaches to estimating equivalence scales, see Van der Gaag (1982) and van Praag and Warnaar (1997).

  4. The later empirical analysis confirms this presumption.

  5. This extends to the same material standard of living according to Eq. (1) if money equivalent income is included in this set of characteristics.

  6. Moreover, \( {\mathbf{X}}_{{{\mathbf{jt}}}} \) could also have a direct impact on \( V_{d} \), thus defining how a given level of equivalent home production translates into material wellbeing. In that sense, \( {\mathbf{X}}_{{{\mathbf{jt}}}} \) may also capture differences in domestic needs.

  7. Empirical results by Kornrich and Roberts (2018) show that household outsourcing, i.e. the purchase of household services that replace household production, increases in household income. Estimates of the elasticity of substitution between time and monetary resources by Gardes (2018) also suggest that both act as substitutes (even though to varying extents for different categories of consumption commodities).

  8. Labor supply can plausibly be considered fixed if working time regulations and/or social norms predetermine hours in the labor market. At least in the short run, this appears to be quite close to German reality, where relatively strong rigidities in contracted working hours restrict employees’ ability to adjust their labor supply at the intensive margin. Similarly, individuals that have chosen part-time work or non-employment typically cannot increase their working hours by small margins, because of relatively fixed thresholds in contracted hours.

  9. This is true for a variety of specifications and even after controlling for leisure time and personal income shares. Estimation results are available upon request.

  10. It is important to note that the proposed empirical method easily extends to accommodate alternative assumptions about the value of domestic work. Some approaches (i.e. the opportunity cost and specialist method) may imply differential benefits from an additional hour of domestic work across households and even individuals. An analysis based on their assumptions will necessitate an evaluation of the proceeds from household production prior to the estimation of household equivalence scales. The derived value will then act as the dependent variable in estimation Step 2.

  11. For a detailed description of the SOEP, please refer to Wagner et al. (2007) and Goebel et al. (2018).

  12. A similar approach values each hour in household production by the wage rate of a professional housekeeper (see e.g. Sousa-Poza et al. 2001). The Federal Employment Agency also offers data on median gross monthly wages by occupational category (Statistik der Bundesagentur für Arbeit 2018), including professional housekeepers (Hauswirtschaftsverwalter). Their wages are considerably lower than overall median earnings, such that the assigned value of household production is lower when applying this method. Unfortunately, one can consistently compare housekeeper’s wages across years only up until 2010. Running the entire analysis on the accordingly restricted sample and evaluating household production at these wages only affects the magnitudes of scale parameters but not their relations. Results are available upon request.

  13. Full-time employment in Germany typically involves 40 h of work per week. Multiplying this by 4.3 weeks yields 172 monthly hours.

  14. For the implications of modelling reference incomes in the estimation of equivalence scales from income satisfaction explicitly, see Borah et al. (2019).

  15. For a review of the direct financial costs related to household members’ disability, see Mitra et al. (2017). The effect of a disability on income satisfaction has been studied, among others, by Pagán-Rodríguez (2012).

  16. Time-use questions are part of the Individual Questionnaire that is distributed to household members above the age of 16 only.

  17. This result critically depends on the assumption of constant, identical returns to domestic production. If productivity increased in monetary incomes, for instance, households with high money incomes would also enjoy higher levels of domestic income. A positive effect of income on productivity could therefore weaken or even reverse the finding of income-poor households being able to catch up. Still, supplementing monetary by household production equivalence scales likely results in lower measured inequality as these put more weight on high domestic incomes of large, money–income rich households.

  18. Note that the average weight of an adult in the aggregate extended income equivalence scale reported in column 1 of Table 4 is quite similar to his or her weight in the modified OECD scale (0.455 vs. 0.5).

  19. A shift of time away from other chores towards childcare recorded over past decades (Bianchi 2000) could imply intertemporal differences in children’s household production equivalence scales, for instance. Similarly, these scales may be affected by the extent of domestic work and childcare varying across countries according to their culture, development and welfare state regimes (Giannelli et al. 2012).

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  1. Faculty of Economics and Management, Otto von Guericke University Magdeburg, P.O. Box 4120, 39016, Magdeburg, Germany

    Melanie Borah

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Appendix

Appendix

See Tables 7 and 8.

Table 7 Sample characteristics.
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Table 8 Descriptive statistics—extended income components by household type (means and standard deviations).
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Borah, M. Estimating Extended Income Equivalence Scales from Income Satisfaction and Time Use Data. Soc Indic Res 149, 687–718 (2020). https://doi.org/10.1007/s11205-019-02262-1

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