- 14 -

Note that the Interaction coefficient for children's wage earnings in<sup>Lima Is weakly negative, which moans</sup> that children's wage earnings have a modest equalizing effect on the distribution of consumption<sup>among households.</sup> This effect Is In contrast with the effect of children's wage work on the inequality<sup>of tne corresponding distribution</sup> of hours of work and is mainly due to nonworking children of rich households<sup>with low or medium total hours of</sup> work. In both cases the children's contribution to overall inequality<sup>is of minor importance, as shown In the first</sup> column of table 5.

In contrast to the results for Lima, wage eamings in other<sup>urban areas yield a modest contribution to total</sup> household consumption, compared to the contribution of the household's<sup>hours In wage work to the households</sup> total hours of work. The fractions are, respectively, 17 and 40 percent.<sup>For the same reason as for Lima the</sup> Interaction coefficients related to the distribution of consumption<sup>are considerably larger than the corresponding</sup> interaction coefficients for the distribution of hours of work. Similar results<sup>hold for the rural areas, although the</sup> distribution of household consumption seems to a greater extent to reflect<sup>the distribution of household hours of</sup> work.

2.4. Inequality in Distributions of Per-Capita Household Consumption The information in section 2.3 about the economic structure<sup>of the labor market must be Interpreted</sup> cautiously when analyzing welfare because of the variations In household<sup>composition and size. To allow for the</sup> fact that some households have several persons while others have just<sup>one, we need an aternative to household</sup> consumption as an indicator of welfare. Clearly, an Index of welfare using<sup>the information on household size and</sup> composition is required. In the PLSS data an equivalence scale accounts<sup>for this heterogeneity. Specifically, the</sup> costs of children are specified in terms of fractions of one aduft. The weights<sup>are 0.2 for a child under 7 years old,</sup> 0.3 for a child aged 7 to 12, 0.5 for a child 13 to 17, and 1 for a person over<sup>17. The sum of these weights for each</sup> household is used as the scale. Consumption per capita is defined as<sup>household consumption relative to the</sup> equivalence scale and it is used as an indicator of household welfare.<sup>Note that these weights are consistent with</sup> the weights estimated for Sri Lanka and Indonesia by Deaton and Mullbauer<sup>(1986) and have been applied by</sup> Glewwe (1987X in analyzing the distribution of welfare in Peru In 1985.86. Glewwe's<sup>analysis is based on expenditure</sup> data rather than on income data.

The lack of sufficient data makes it impossible to distinguish<sup>consumption levels among members of the</sup> household. Therefore we have to assume that the welfare level of an<sup>individual is equal to the per capita</sup> consumption of the household. It is particularly interesting to examine<sup>the relationship between the distribution of</sup> per capita household consumption among households and the distribution<sup>of per capita household consumption</sup> among persons.