A Democratic Measure of Household Income Growth: Theory and Application to the United Kingdom (ESCoE DP 2018-02)

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A Democratic Measure of Household Income Growth: Theory and Application to the United Kingdom (ESCoE DP 2018-02)

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This paper develops a price and quantity system of indicators structured round Atkinson’s concept of inequality aversion. A democratic indicator of income growth, weighting each household’s growth experience equally, is shown to result when Prais’ democratic price index is used to deflate the geometric mean of equivalised household income. A welfare interpretation of the democratic indicator of income growth is provided and it is shown that, with heterogeneous but homothetic references, the deflator can serve as a common scaling social cost of living index when applied to income as well as to consumption. Application to United Kingdom household data suggests that, over the interval 2005/6-2015/6 democratic real equivalised household income grew by 0.20 per cent per annum while the plutocratic
equivalent grew by 0.52 per cent per annum.