## Equivalent income

Equivalent income, also known as ‘equivalised disposable income’, is an equivalised household income figure adjusted for different household compositions.
Equivalent income shows the average purchasing power of the household members,
consisting of a household’s total income, divided by the number of household members converted into equalised persons weighed according to their age.

All household members – children and adults – are ascribed the same equivalent income.

With this calculation method, incomes of different types are made comparable by taking account of shared consumption benefits. A large household needs a higher total income than a small one; however, a large household has shared consumption benefits. For example, a five-person household does not need to pay five times for everything (e.g. energy, domestic appliances, etc.).

An adjusted consumption unit scale is applied to make incomes of households of different types comparable. The first adult in a household is given the weight 1, other adults are given the weight 0.5, while children below the age of 14 are given the weight 0.3.

Definitions:

• Income is money received through work or through proceeds from one’s own business, state benefits such as pension, unemployment benefits, interest subsidies and student grants, plus capital gains such as interest and dividends.
• Gross income is the total income before subtraction of taxes and other statutory deductions.
• Net income is income remaining after taxes and other statutory charges have been deducted.
• Median income is the income amount dividing the population into two equal groups, with half of the population having an income higher than this amount and the other half lower.
• Average income is calculated as a normal average.
• A household is defined as the number of people who are registered as persons having the same residence the last day in the year. Residents of institutions or boarding houses are not included in household statistics. This means that household figures do not represent the total population. An additional requirement for inclusion in a household statistic is that at least one person in the household has been fully taxable the entire year. Adults are 18 years or older.
• The income in a given percentile group is the average income of the person in the percentile group.

Example:

An example with two different households:

Household 1 consists of one person with an annual net income of DKK 200,000.

Household 2 consists of two adults and two children. The household has a total annual net income of DKK 420,000.

As household 1 only has one person, the equivalent income of this household is DKK 200,000.

Household 2 consists of four persons, or consumption units. Using the adjusted consumption unit scale mentioned above, the equivalent income is calculated as: DKK 420,000 divided by 2.1 (1+0,5+0,3+0,3) = DKK 200,000.

After adjusting for the different household compositions, both households thus have an annual equivalent income of DKK 200,000.
All household members – children and adults – are ascribed the same equivalent income.

Comment:

Equivalent income figures have a lag of approx. one year, since income statistics are based on tax authority TAKS’s tax list, which is not completed until just over a year after the registration year when all income assessments have been concluded.

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