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

Abstract Equivalence scales are a central component of distributional analysis. They adjust household incomes for size and composition, shaping poverty and inequality measurement. Most work relies on the modified OECD scale from the mid-1990s, despite substantial changes in consumption patterns since. We revisit equivalence scales for 23 European countries using a demand model based on the linear expenditure system and harmonised Household Budget Survey microdata 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 as a sensitivity check. Across specifications, the demand-based estimates generally imply larger economies of scale than the modified OECD scale, especially for larger households. Scales are lower at higher living standards and exhibit a modest downward trend over time. A simulation of 2020–2024 price changes shows that recent inflation is likely to further reduce scales, with stronger impacts for households with children. Regional heterogeneity persists, reflecting differences in prices, preferences and consumption patterns. Recomputing distributional indicators shows that poverty measures are more sensitive than inequality measures to the choice of equivalence scale. The utility implicit scale typically yields the largest increase in measured inequality relative to the OECD benchmark. Overall, our results indicate that equivalence scales used in distributional analysis should be periodically updated and distributional statistics routinely reported under alternative scales.