be used to compare any family type with any other family type and so to produce a complete set of equivalence scale values. This method will presumably also capture any economies of scale so long as they are reflected in the food share, as they must be if the Engel assertion is correct.
It is also possible to extend the Engel method beyond the share of food to the share of other necessities; this iso-prop approach was introduced by Watts (1967; see also Seneca and Taussig, 1971) and underlies the Canadian low-income cut-offs (LICOs) (see Wolfson and Evans, 1989). When goods other than food are included, the assumption is that the share of those goods indicates family welfare. Hence, the procedure will work in the same way as does Engel's, provided that the share falls with income (because the goods are necessities) and rises with family size.
The Engel method and its iso-prop variants are only as good as the basic assumption that the food (or other necessity) share correctly indicates family welfare, which can be argued. Even if Engel's Law is correct, and even if larger families spend a larger share of their budget on food, there is no automatic implication that the food share is a valid indicator of the standard of living. Engel's Law says that richer families have lower food shares, so that, among families of the same composition, it makes sense to argue that families with higher food shares are poorer than families with lower food shares, which is no more than a restatement of the law. Larger families spend a larger share on food, as do poorer families, but it does not follow that larger families spend more on food because they are poorer or that one can measure how much poorer they are by calculating the income drop that would have produced the same effect.
Nicholson (1976) has convincingly argued that the food share is a poor indicator of the standard of living. Consider again a married couple who have their first child, and suppose for the purposes of the argument that one has managed to calculate the correct compensation and that the appropriate amount has been paid to the family. What will happen? The parents have been fully compensated and so are expected to spend, out of their share of family resources, the same fraction on food as they did before the birth of the child. But a child consumes mostly food and clothing, so this fully compensated family actually spends a larger share of its total budget on food. According to Engel, the family is worse off than it was before because its food share is higher, and it must be paid more to compensate it for the cost of the child. By this argument, the compensation calculated according to the Engel method assigns too large a cost to children. Nicholson's argument is a persuasive one, and we do not believe that the food (or necessities) share should be used to calculate equivalence scale values.
Instead of using food share, Rothbarth (1943) used expenditures on adult goods as an indicator of the standard of