Measurement – session 5

Wages and Income

Issues in mst of wages and income

• Wages = individual

• Self-employment, capital : how to measure their income?

• Other (non-monetary) resources?

• How to compare households of different size and composition?

• Income = a household level variable?

Issues in mst of wages and income

• Why do we want to measure income?– We assume income = money = a “universal

equivalent” with which each consumer can buy whatever s/he wants

– Should we not be measuring consumption, or “capabilities”? Or (subjective) welfare/happiness?

Income or consumption?

• Consumption reflects income as well as past savings, access to credit markets, and seasonal variation in income

• No records of income or seasonal fluctuations

• Large informal sectors• Consumption data helps in deriving the

poverty line

Income or consumption?

• Measuring income is a theoretical, ethical choice: income is supposed to offer potentially anything, whereas consumption is the outcome of a choice

• It’a a liberal point of view : we want to measure situations before choices, and not care about the outcomes

The measurement time-frame

• There is no good reason to choose the year as unit

• Some consensus that poverty is real when deprivation for 3 years (consumers smooth their consumption, save or borrow…)

• But panel data is so noisy it doesn’t improve measurement!

Data needs for poverty analysis

• National level data– National accounts – GDP, consumption,

savings, investment, imports, exports, etc.– Ministry of Finance, Central Statistical Agency– Budgets, price surveys, and data collection– Monthly, quarterly, and yearly

Data needs for poverty analysis

• Household – Individual level data– Household income, consumption, employment,

assets, production, demography, etc.– NSIs, sectoral ministries, NGOs, academics– Household survey, rapid assessments,

monitoring and evaluation– Yearly, 2-3 years, every 5 years…

Available data

• Administrative data: taxes and payrolls, mainly

• Population Census• Household surveys – Labor Force Survey,

HBS, SILC (European Panel)• Qualitative and Participatory Assessments –

ethnographic, village studies, beneficiary assessments, etc.

(1) Wages

• What’s in a wage?– Much is excluded: all the in-kind payments– Time frame: hourly, monthly, yearly wage?

• Statistical sources– Wages: employer’s tax declarations– Wages and employment: Labor Force Survey– Income: households’ income tax declarations

(1) Wages : average annual wages (full-time workers)

Private sectorCivil servants

(1) Wages : annual earnings

• But define earnings as the sum of wages earned over one year by all those who have worked at least 1 day

• The diagnosis is quite different

(1) Wages : annual earnings

That is because earnings are a composition of wages earned * number of days worked

Here are the average number of worked days for men and women

(1) Wages : annual earnings

Earnings are a composition of wages earned * number of days worked

Here are the average number of worked days for men and women, by age group

(1) Wages : annual earnings

The average yearly wage from national accoutning sources can also look very different depending on the numerator and denominator you choose

(1) Wages : annual earnings

• National accounting: – all wages/ ”average labor force”: (number of employed

at beginning of year+ at end of year) /2

– Alternative denominator: all those who have worked at least 1 day during the year

– Gross wages have increased much more than net wages because taxes on wages have increased

– The diagnosis is definitely not the same!

(2) Other income

• Self-employed– Taxes are an unreliable source– Depend on the legal status of the business

• More fundamental problem: for themselves, there is no conceptual difference between their household budget and their business’

(2) Other income

• Survey data: – Finally, European comparisons are made from

survey data– SILC: survey on income and living conditions– Many questions on income

• Survey effect: the more numerous the questions, the richer the respondents!

What’s in an income

• Things that are ill-measured:– Income from capital (wealth): would have little

impact on poverty since almost entirely above the median

– Yet changes a lot when considering inequality

Taxes

• Again, not simple:– Income tax = is removed from disposable

income– But what about local taxes?– Again, it depends on what you consider a

choice or not – Ex: is living in Paris a choice? Yes you use

your income to pay local taxes. No local taxes should be removed from income

Transfers between HH

• Alimonies and the money transfers of migrants to their homeland are removed from disposable income

• But it may underestimate income: migrants send money for their own future use, too

What’s in an income

• Choices of what to include are often made for no good theoretical reason but practical ones

Recent pushes towards better income measurement

• French official report (CNIS)+ general Eurostat tendency

• Goal = take better account of non monetary resources

Recent pushes towards better income measurement

• Imputed rent– Owning your home

Recent pushes towards better income measurement

• Home production

Recent pushes towards better income measurement

• Public goods (that can be individualized)

Niveaux de vie

• D’abord faut le définir:– Income (gross – net – including non market

goods?)– By consumption unit

(1) Wages : annual earnings

Equivalence scales

• Are used in setting level of allowances• Ex « RMI » in France

– 425,40 € for 1 single person– 638,10 € for 1 couple – 765,72 € for 1 couple + 1 child.

• Underlying hypothesis: 425,40 € buys same quality of life when single than 765,72 € when 2 parents + 1 child – 638,1= 425,40 + 0,5* 425,40 – 765,72= 425,40 + 0,5* 425,40 +0,3* 425,40

• Implicit equivalence scale: 1st adult = 1; 2nd adult = 0,5; child = 0,3

Equivalence scales : Where do they come from?

• No consensus: example of number of consumption unit / child?

• Household budget surveys: ‘direct’ child expenses ~ 8%. But how to “split” food, housing… expenses? -> comparing parents / non-parents (but: unobserved taste differences). Much noise!– Lechêne, 1993 : between .2 and .7

• Subjective measurements (“how much do you need to…”) -> even wider dispersion

Equivalence scales : example on 4 variants

Source: “Du bon usage des échelles d’équivalence L’impact du choix de la mesure”, Jérôme Accardo. http://www.cairn.info/revue-informations-sociales-2007-1-page-36.htm

1st adult 2nd adult Other adults Child<14OECD modified 1 0,5 0,5 0,3Oxford 1 0,7 0,7 0,5No economies of scale 1 1 1 1Strong economies of scale 1 0,2 0,2 0,2

• The 4 variants

Equivalence scales : example on 4 variants

All figures calculated on fiscal data for 2001Source: “Du bon usage des échelles d’équivalence L’impact du choix de la mesure”, Jérôme Accardo. http://www.cairn.info/revue-informations-sociales-2007-1-page-36.htm

• ResultsPovty threshold (€/year)

Poverty rate (%)

Gini inequality coefficient

change in poverty rate, 1996-2001

OECD modified 7227 6,1 0,27 -1,1Oxford 6113 6,8 0,28 -1,4No ec.s of scale 4820 9,7 0,3 -1Strong ec.s of scale 9442 6,9 0,28 -0,5

Equivalence scales : example on 4 variants

Source: “Du bon usage des échelles d’équivalence L’impact du choix de la mesure”, Jérôme Accardo. http://www.cairn.info/revue-informations-sociales-2007-1-page-36.htm

Composition of “the poor” depending of equivalence scale used

From top to bottom:

- Couple w. children

- Couple w.out children

- Single parent w. children

- Single adult

Intra-household allocation

• Duflo and Udry (2004) [NBER Working Paper 10498]

• Data : the Côte d’Ivoire Living Standards Measurement Survey (CILSS). 1985-1988. 1,500 HH

• Some crops are cultivated by men, others by women

• They do not benefit equally from rain

Intra-household allocation

• Results:– Rainfall shocks associated with high yields of

women’s crops shift expenditure towards food– Rainfall-induced fluctuations in income from

yams are transmitted to expenditures on education and food, not to expenditures on private goods

– Other crops fluctuations are associated with more consumption of private goods

Intra-household allocation

• Evidence from sociology in the US and France– Income is not 100% shared among household

members– There are intra-household variations in

disposable income and consumption– But we know way too little to take them into

account statistically… so far.

In 2001 in a few European countries

Lessons to be learnt

• On child poverty: policy impact of measurement linked with ideology of those you want to convince (figures for advocacy)