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Measuring Poverty: A New Approach
dently for each family type (as the official thresholds were originally constructed). However, we believe that it makes more sense to develop a threshold for a reference family and then use a formal equivalence scale to adjust that threshold for different numbers of adults and children. We also recommend that the thresholds be further adjusted by an index of differences in the cost of housing across geographic areas as a feasible way of implementing a cost-of-living adjustment (see below).
Second, we believe that in addition to accounting for different needs of families by number of adults and children and geographic area of residence, it is critical to account for different needs due to the fact that some families incur nondiscretionary expenses that are not available for consumption. For example, some families pay for child care in order to earn income, whereas other families (and individuals) make no such payments, yet the official thresholds are the same for both situations. One way to recognize these different circumstances is to develop additional thresholds, such as thresholds for nonworking families, working families with children who pay for child care, and other working families. We recommend instead that nondiscretionary expenses—which we define as taxes, child care and other work-related expenses, child support payments to another household, and out-of-pocket medical care expenditures (including health insurance premiums)—be deducted from the income of families with such expenses. This approach will more accurately capture the poverty status of families in different circumstances than would the approach of trying to develop a range of different thresholds. However, our approach has implications for comparing poverty thresholds across concepts: a reference family threshold developed as we propose will necessarily exclude some expenses that are typically averaged in for all such families.
Third, we consider that the decision about whether (and to what extent) to update the official poverty line for real growth in consumption has important implications for the choice of a poverty threshold concept and, indeed, for how much attention one needs to give to the threshold concept as opposed to other aspects of the poverty measure. We briefly discuss the updating issue before turning to our recommended threshold concept.