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Population Aging
across people of different ages, and about the existence of economies of scale (Deaton and Paxson 1995). First, consider the needs of people of different ages and of the situation of two households of the same size but of dissimilar demographic composition. If the cost of financing children’s basic consumption is lower than the cost of financing the consumption of adults, then the household with more adults will need higher per capita income to reach a given welfare level. The effect of different assumptions about the cost of children on the absolute poverty rate of the adults and of the aging will depend on the particular family arrangements in each country. Second, consider the existence of economies of scale in the household. Economies of scale allow a couple to live on less than double the budget of a person living alone. Larger households share in the consumption of some goods and services such as electricity, heating, and others, where consumption by one family member does not reduce availability of the good for consumption by others in the household. Note that considering economies of scale in the analysis will affect both absolute and relative poverty rates of the aging. In this section we will take into account both considerations and study how estimates of poverty incidence for different age groups change as the assumptions are modified. In our approach, we proxied individual wellbeing by total household income deflated by an equivalence scale, defined as a function of the size of the household and its demographic composition. There is long-standing literature on equivalence scales (see Deaton and Paxson 1998a). We follow the approach of Buhmann and others (1988) and Deaton and Paxson (1997) by assuming a parametric form for the equivalence scale and examining the consequences of changing the parameters. In particular, we assume that the living standard of an individual i living in household h is given by: x ih =
Yh (α1C1 + α2C2 + A)θ
where. C1 is the number of children under age 5, C2 is the number of children aged 6–14, and A is the number of adults. Parameters a allow for different weights for younger and older children compared with adults, while q regulates the degree of household economies of scale. When q = 1 there are no economies of scale, while at the other extreme, when q = 0, there are full economies of scale, meaning that all goods in the household could be shared completely (that is, they are all