The basic unit of anaiysis

The basic units of analysis commonly used in research on income distribution are either individuals or households. Using individuals as the income-receiving unit, that is, measuring incomes received by individuals as if all of them lived alone, ignores the fact that many of them share in the living standards of other individuals. This is the case of children who do not receive any income in their own right, but who share in the living standards of their parents or, in the case of elderly people, who live with

the household surveys and the labour remuneration per capita reported by the Central Bank divided by the latter. The values were fairly constant for all years 1989-1996.

their grown-up children who are no longer dependants. Also, there are so many couples in which one partner has a job while the other is unemployed. So, an individual based analysis would treat children, dependant elderly people, and the unemployed partner as in extreme poverty, despite the fact that they could be enjoying high levels of living standards.

Therefore, the most convenient income-receiving unit seems to be the household in which occupants share in the living standard. However, households are quite heterogeneous, ranging from those households which involve only a family unit (husband, wife and children) to households containing a number of unrelated individuals. This is the reason why it would not be accurate to assume that the sharing within households is everywhere equal. W hilst in some, households might be fully sharing, such as in some family units, in others the degree of sharing might vary. Goodman, Johnson and Webb (1997) discuss several theories that have been developed on trying to predict how sharing within a household is determined, but the applicability of these approaches relies on information on consumption, or about how budgeting occurs within the household and who has control over resources. As the authors argue, the sharing issue is important since inequality measured on the assumption that there is complete sharing will be lower than that using alternative assumptions. Unfortunately, the data available for my research has limitations to make feasible the application of the alternative assumptions, since it does not provide information on consumption or expenditures. This is the reason why I will be using the household as the income-receiving unit, and assuming complete sharing within it. But, when the household is assumed as the income-receiving unit, it is important to take into account the household size when income is used as a proxy of the living standard. The common method used in the literature is dividing total income received by the household by the number of its members, leading to the concept of income per capita. However, the idea that two can live more cheaply together than two living separately raises the need for some different adjustments to household income as a measure of the living standard of its occupants. There are goods that can be used by all household members at no additional cost. Also, children have different needs than adults as they consume special goods and less quantities of other goods. So, children

should count as a fraction of an adult, the fraction depending on age and on the number of children, since the second and subsequent children cost less than the first one, as well as the second and subsequent adult in the household should count as a fraction of the first adult. In this way, the household size should be measured in numbers of adult equivalents instead of numbers of persons.

These adult equivalents are calculated through the use of equivalence scales, for which different methods have been developed. Engel’s is the oldest and most straightforward one, and is still widely used, which applies the share of the budget spent on food as an indication of the welfare between households of differing demographic composition^^. Equivalence scales differ one from another in the weights given to extra individuals (children or adults) in a household. According to Goodman, Johnson and Webb (1997) the extremes are those giving full weighting to each individual equivalent to the weight of the first adult in any household (per capita measure of income) and giving no weight at all to the second and subsequent individuals (raw household income).

Survey data on household expenditures is the basic information needed to construct equivalence scales, as such data can be used to study how demand patterns vary with the demographic composition of the household (Deaton, 1997). Unfortunately, only one survey covering information on household expenditures has been conducted in Venezuela by the Central Bank, as explained e a r l i e r ^ a n d no equivalence scale has been constructed, leaving the two extremes mentioned above as the only options available in Venezuela. Therefore, I will apply the per capita measure of income, since making no adjustment at all for household size would make large households appear to be better off than they actually are.

In order to carry out the analysis, the sub-groups are formed, as stated earlier in sub­ section 4.3.3, dividing the population based on characteristics of the household head. The definition of household head adopted in this research is the same as that used by

For a detailed discussion o f this and other methods see Deaton (1997) and Goodman, Johnson and Webb (1997).

OCEI in the surveys, being this the person identified by the household members as the head.