2004 INDIGENOUS AND OTHER AUSTRALIAN POVERTY 411 411 THE ECONOMIC RECORD, VOL. 80, NO. 251, DECEMBER, 2004, 411–422 © 2004. The Economic Society of Australia. ISSN 0013–0249 Indigenous and Other Australian Poverty: Revisiting the Importance of Equivalence Scales* BOYD H. HUNTER Centre for Aboriginal Economic Policy Research, Australian National University, Canberra, Australian Capital Territory, Australia STEVEN KENNEDY Australian Treasury, Canberra, Canberra, Australian Capital Territory, Australia NICHOLAS BIDDLE Centre for Aboriginal Economic Policy Research, Australian National University and, Australian Bureau of Statistics, Canberra, Australian Capital Territory, Australia Equivalence scales attempt to control for family size and composition, as well as the relative costs of maintaining various family types. The 1995 National Health Survey is used to examine how variations in the assump- tions underlying equivalence scales, such as household composition and economies of size, affect poverty measures for Indigenous and non- Indigenous Australians. The main finding is that the assumptions about the costs of children can increase Indigenous poverty by a factor of two- and-a-half. Another finding is that the choice of equivalence scales can induce large threshold effects that influence the composition of poverty. I Introduction It is impossible to estimate poverty on a value- free basis. Researchers, instead, attempt to ensure that the assumptions made in measuring poverty are transparent and can be evaluated by commentators contributing directly to the policy debate. Although this principle is admirable, the statement of appar- ently simple assumptions can often hide the immense complexity of the processes underlying poverty meas- urement. The present paper attempts to illustrate how the composition of the poor changes with small vari- ations in seemingly innocuous assumptions about income measurement. The use of income to measure well-being in the present paper should not be taken as a blanket en- dorsement for its use in all circumstances, especially given the obvious limitations of monetary income in the Indigenous Australian context (Altman and Hunter, 1998). 1 There are also analogous limitations in using income to measure the well-being of the rest of the population: particularly the measure of income used in the present paper, which is equivalised gross household income. 2 Although the measure of income used in the present paper does not enable us to make direct welfare comparisons, we are still able to illustrate the impact of equivalence scales on income distributions and poverty measurement. Poverty lines are commonly distinguished by whether they are ‘absolute’ or ‘relative’. Absolute poverty commonly refers to people who live in families that do not have enough money to purchase the basic necessities, such as food and housing. The development literature is replete with criticism of the notion of basic needs, which is more subjective than it appears at first glance. Indeed, the concept of 1 For example, there is substantial non-cash income from hunting and gathering activities in remote areas. 2 For example, recorded monetary income falls short of the concept of ‘full-income’, which incorporates physical capital and consumer durables that provide a flow of ser- vices (see Barr, 1987). * The views expressed in this paper are those of the authors and do not necessarily represent those of either the Australian Bureau of Statistics or the Australian Treasury. Correspondence: Boyd Hunter, Centre for Aboriginal Economic Policy Research, Hanna Neumann Building, Australian National University, Canberra, ACT 0200, Australia. Email: boyd.hunter@anu.edu.au