Measuring the costs of children: An alternative approach

The cost of a child or, the general equivalence scale as it is more commonly known, is a concept of considerable importance in matters relating to public policy and welfare. It has played a crucial part in numerous theoretical and empirical studies relating to poverty, income distribution, dietary needs, income maintenance programs, supplementary and child benefits and other forms of social security payments in a welfare state, and in assessing the horizontal equity of income taxation. In spite of a long tradition of estimating the scale from observed household budget data, there remain severe problems in estimation and interpretation of the scales. This paper proposes a new methodology for calculating the scale using a framework which is consistent with utility theory and which overcomes the identification problem without having to enforce the arbitrary prior assumptions of recent studies. The proposed method allows easy calculation of not only the basic scale parameter but also how it varies with price and reference utility. We illustrate the usefulness of the procedure by estimating on U.K. budget data at two different levels of aggregation and employing two sets of quite different functional forms. The results are plausible, compare favourably with one another and, hence, confirm the robustness and usefulness of the proposed procedure.