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Large households find it easier to escape poverty

The larger the household, the greater the likelihood that it will escape poverty. Each member of a large family pays less for housing, food, clothing and furniture due to economies of scale. They have lower transport and telecommunications expenses than members of small families do, say Kseniya Abanokova, Junior Research Fellow at the Centre for Labour Market Studies, and Michael Lokshin, Leading Research Fellow at the Centre.

Assessments of poverty in large households are overstated, say Kseniya Abanokova and Michael Lokshin in an article entitled ‘The Effect of Adjustment for Economies of Scale in Household Consumption on Poverty Estimates in Russia’. This article is the result of a research project implemented as part of the HSE Basic Research Programme.

Official estimates of poverty in Russia are made in per capita terms. Most research on the issue of poverty in the country also uses per capita income/expenses as an indicator of individual wellbeing and does not account for economies of scale in household consumption.

However, as Lokshin and Abanokova assure, taking economies of scale into account when measuring individual wellbeing that affects the level and profile of poverty. In other words, large households can reach a certain level of wellbeing at a lower per capita cost than smaller households can. Such a correction can significantly change the size and profile of poverty in segments of the population that have traditionally been the focus of socially oriented programmes.

When size matters

The effect of economies of scale has been investigated by both Russian and international scholars for approximately 20 years. Work in this field has shown that the existence of even small economies of scale in household consumption can significantly change the demographic profile of poverty in several countries of eastern Europe, as well as south and central Asia. Experts have not only confirmed the reduction of poverty when correcting wellbeing for economies of scale, but they have also found that the larger the household, the more likely it is to escape poverty.

As for Russia, the authors argue that the need to correct individual wellbeing by household size when measuring poverty was realized a long time ago, but little empirical work has been done using Russian data. Abanokova and Lokshin decided to verify how sensitive poverty estimates with respect to the parameters of economies of scale and show how the profile of poverty changes depending on the choice of specific parameters.

They made their assessment using a wide range of methods and provided comparative evaluations of the effect of scale over time during the period from 1994 to 2011. ‘We found that regardless of the method, the sizes of economies of scale in Russia are significant’, conclude the researchers. ‘The savings in consumption achieved by Russian households significantly changes the poverty level compared with the official approach. In particular, we show that official estimates of poverty among large households are overstated’.

Data from the Russia Longitudinal Monitoring Survey on economic status and health for the years 1994-2011 was used as an empirical basis. Households that do not have members over 18 years of age, have negative or zero expenses for food, or do not have information on the age and sex of household members were excluded from the sample.

The final size of the representative sample ranged from 3,957 households in 1994 to 6,365 households in 2011. Costs were used as a measure of wellbeing because they are more resistant to temporary fluctuations in income. Using costs also allowed the cost of food produced and consumed in the household to be considered.

Recalculated poverty

In order to determine the dependent variables for the equations, the authors identified 12 groups of expenses:

  • meals at home
  • meals outside the home
  • consumer services
  • clothing and footwear
  • heat and natural gas
  • transport services and telecommunications
  • housing
  • health care and education
  • household furnishings
  • electronics and household appliances
  • real estate
  • other

In particular, the cost of food is at least 40% of the total budget of Russian households, and housing makes up the second largest expenditure (15%). The other groups of expenses do not exceed 10%.

The calculations showed that statistically significant economies of scale were maintained for 2005, 2006 and 2011. The biggest economies of scale were found in housing expenditures. Despite the fact that food and clothing are traditionally considered private goods, the results suggest that they also provide economies of scale. Economies of scale are also present in costs for transportation, telecommunications, household furnishings, electronics and household appliances.

A subjective evaluation was also introduced into the calculations as a dependent variable. For this, respondents were asked to rate their level of wellbeing on a nine-point scale, where one is equal to the poorest, the nine is equal to the richest. In 2001, more than 70% of households placed themselves at 3, 4 and 5. Only about 2% of households placed themselves in the lower and upper levels.

The researchers found that regardless of the method, the size of economies of scale in Russian households’ consumption is significant. In addition, the overall poverty rate is reduced with the introduction of economies of scale.

According to Abanokova and Lokshin, the results obtained can be used to improve the targeting of social assistance. However, the experts believe that it is first necessary to conduct additional surveys of household income and expenditures to ensure the sustainability of the results. The next step in the research could be the answer to the question as to whether significant economies of scale in consumption of Russian 
Author: Гринкевич Владислав Владимирович, March 10, 2015