Consumption Patterns, Inflation, and Household Welfare: Demand-Based Equivalence Scales in Europe

Martina Pezer (), Denisa M. Sologon (), Iryna Kyzyma (), Eugenio Peluso () and Cathal O'Donoghue ()
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Martina Pezer: Institute of Economics, Zagreb
Denisa M. Sologon: LISER
Iryna Kyzyma: LISER (CEPS/INSTEAD)
Eugenio Peluso: University of Luxembourg
Cathal O'Donoghue: University of Galway

No 18340, IZA Discussion Papers from Institute of Labor Economics (IZA)

Abstract: Equivalence scales are central to distributional analysis, adjusting household incomes for size and composition and shaping poverty and inequality measurement. Despite changes in consumption patterns, most applied work continues to rely on the modified OECD scale from the 1990s. We revisit equivalence scales for 23 EU countries using a linear expenditure demand system and harmonized Household Budget Survey data for 2010–2020. We estimate three demand-based scales: a minimum-needs scale anchored in subsistence, a utility-implicit scale based on welfare equivalence under common preferences, and a utility-explicit scale for sensitivity analysis. Our estimates imply larger economies of scale than the modified OECD scale, particularly for larger households. Scales decline with living standards and over time. Simulations of 2020–2024 price changes suggest that recent inflation is likely to further reduce equivalence scales, with stronger effects for households with children. While regional heterogeneity remains, poverty measures are more sensitive than inequality measures to the choice of scale. The results highlight the need to update equivalence scales and to report distributional statistics under alternative assumptions.

Keywords: household consumption patterns; linear expenditure system; demand system; equivalence scales; income distribution measures (search for similar items in EconPapers)
JEL-codes: D12 D31 E31 I32 (search for similar items in EconPapers)
Date: 2025-12
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