Engel's Equivalence Scales: Theory and Practice

Abstract

The Engel’s approach is largely used to estimate equivalence scales. In this paper, we start by recalling the theoretical framework of this approach as well as the econometric methods which are usually adopted to estimate the Engel’s scales. We point out the different elements that may largely influence the estimated equivalence scales. Also, we discuss some possible pitfalls and how certain country contexts can lead to equivalence scale estimations which violate Engel's laws. For instance, this can be the case where extreme poverty is widespread. We show how the choice of the minimum expenditure threshold, the model’s specification, the demographic characteristics of the reference household and the reference age group can all substantially modify estimates of equivalence scales. The issues are illustrated using household data from Burundi and Mali.