One problem with the current implicit equivalence scale is that it takes into account only economies of scale related to food but not other items, such as shelter. It also contains a number of irregularities. For example, while economies of scale are thought to increase as families get larger, this is often not the case with the current scale, in which the addition of a fourth person adds considerably more dollars to the threshold than, say, the second person—a counterintuitive feature. Recognizing these problems, the National Research Council (NRC) report offered a set of recommendations for improving the equivalence scale.
The 1995 NRC report acknowledged that the adoption of any particular equivalence scale requires judgment. After reviewing a number of options, the report recommended a scale that took two factors into account: (1) children consume less on average than adults and (2) there are economies of scale in households so that a decreasing dollar amount should be added to the poverty threshold for each additional family member. Again, the thinking behind the latter feature is that adding a second adult to a family should raise the threshold by a higher dollar amount than, say, adding a fifth. Mathematically, the recommended scale takes the following form:
equivalence scale = (A + P*C)F,
where A equals the number of adults in a family, C equals the number of children, P is a parameter describing the proportion of the cost for an adult that a child should cost, and F is a parameter describing the extent of economies of scale. If P equals 1, for example, then children are assumed to consume the same amount as adults. If F equals 1, then no economies of scale are assumed, as each additional adult adds the same dollar amount as the previous adult. The panel recommended that P should equal 0.70 (children are assumed to consume seven-tenths of the amount consumed by an adult), and F should be set between 0.65 and 0.75. Census Bureau reports on experimental poverty measures often used the midpoint of these F values (0.70) (Short et al., 1999; Short, 2001a).
David Betson (University of Notre Dame), a member of the panel that authored the NRC report who has written extensively about equivalence scales, reiterated his views that a reasonable scale should be guided by the assumption that the marginal cost of adding an adult or child should decrease with an increase in the number of adults and that children should cost less than adults (Betson, 2004), with one exception. The exception is