Tracking living standards: is it done better by EDY or HEDY?

John Jensen, Vasantha Krishnan

There has been longstanding interest in the extent to which commonly available standard statistical information can provide a valid basis for monitoring hardship. The most common approach is based on applying income equivalisation to household income data.

In this paper, a particular application of that approach is used to specify a metric called EDY. A second metric, called HEDY, is also specified. Its novel feature is that it incorporates an adjustment intended to take account of the variability in housing costs that occurs independently of income (reflected in previous findings that some with low incomes have relatively high housing costs and vice versa).

A series of analyses are made comparing the properties of EDY and HEDY with a view to assessing which on balance provides the better basis for monitoring living standards. The results show that both display similar trends over the decade 1988-98, although HEDY moves more smoothly, showing less year-to-year fluctuations. However, they present somewhat different pictures of the relative position of some sub-populations, with HEDY results implying that economic changes occurring over the decade have had a disproportionately severe impact on the living standards of children.

The authors conclude by stating their provisional preference for the HEDY metric, but point to the need for further work – which they intend to carry out – to more clearly resolve the issue.