Exploring Heterogeneity in Equivalence Scales and Minimum Income Protection

ABSTRACT Korea's minimum income protection system has significantly expanded both its coverage and benefit levels. Moreover, the first‐ever universal benefit was introduced during the COVID‐19 pandemic. However, improving an equivalence scale has received relatively little attention. This current scale is benchmarked to the (old) OECD scale and assigned equivalent weights to adults and children. Therefore, this study aims to estimate more practical equivalence scales. The main findings indicate that the empirical scale is smaller than the (old) OECD scale and assigns relatively greater weight to adults than to children. Meanwhile, due to Korea's education fever, education expenditure places more weight on children than on adults. Second, non‐shareable goods scored on larger scales than shareable goods, implying that additional household members need more income to maintain consumption for non‐shareable items. Finally, heterogeneity in equivalence scales across consumption‐to‐income ratios, based on the Engel approach, indicates that low‐welfare households require greater income support. Therefore, these findings suggest that policymakers refine equivalence scales by assigning greater weights to adults, non‐shareable goods and minimum income support than children, shareable goods and universal benefits.