2
Poverty Thresholds

As we describe in Chapter 1, we conclude that the current measure of poverty should be revised for several reasons. First, the measure is flawed in the definition of family resources. The resource definition counts taxes as income, although taxes are not available for consumption. A before-tax income definition is also inconsistent with the original threshold concept, which was derived on an after-tax basis. In addition, the resource definition does not count in-kind benefits as income, although such programs as food stamps are designed to provide for consumption.

Second, the measure is flawed in the adjustments to the thresholds for different family circumstances. There are anomalies in the adjustments for family type and size (i.e., in the implicit equivalence scale), and there are no adjustments of any kind for geographic cost-of-living differences. Third, the measure does not distinguish between parents who work outside their homes and workers generally versus nonworkers, or between people with higher versus lower health care needs and costs—either by adjusting the thresholds or (as we propose) by deducting nondiscretionary expenses from income. Changes over the past three decades, including socioeconomic changes (such as the increase in the proportion of working mothers), demographic changes (such as the growth in elderly households), and government policy changes (such as changes in tax laws and the growth of in-kind benefit programs), have made all of these aspects of the current measure increasingly problematic for its primary purpose of informing policy makers and the public of differences in poverty rates across time and among population groups and areas.

Fourth, the concept for the official poverty thresholds is problematic. That concept originally was the cost of a minimum diet times a multiplier to



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Measuring Poverty: A New Approach 2 Poverty Thresholds As we describe in Chapter 1, we conclude that the current measure of poverty should be revised for several reasons. First, the measure is flawed in the definition of family resources. The resource definition counts taxes as income, although taxes are not available for consumption. A before-tax income definition is also inconsistent with the original threshold concept, which was derived on an after-tax basis. In addition, the resource definition does not count in-kind benefits as income, although such programs as food stamps are designed to provide for consumption. Second, the measure is flawed in the adjustments to the thresholds for different family circumstances. There are anomalies in the adjustments for family type and size (i.e., in the implicit equivalence scale), and there are no adjustments of any kind for geographic cost-of-living differences. Third, the measure does not distinguish between parents who work outside their homes and workers generally versus nonworkers, or between people with higher versus lower health care needs and costs—either by adjusting the thresholds or (as we propose) by deducting nondiscretionary expenses from income. Changes over the past three decades, including socioeconomic changes (such as the increase in the proportion of working mothers), demographic changes (such as the growth in elderly households), and government policy changes (such as changes in tax laws and the growth of in-kind benefit programs), have made all of these aspects of the current measure increasingly problematic for its primary purpose of informing policy makers and the public of differences in poverty rates across time and among population groups and areas. Fourth, the concept for the official poverty thresholds is problematic. That concept originally was the cost of a minimum diet times a multiplier to

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Measuring Poverty: A New Approach allow for all other expenses; however, as implemented, the concept is simply the threshold value that was set for 1963 updated for price changes. Hence, whether the concept is still relevant today, given the increase in the U.S. standard of living over the past 30 years, is very much a question. THRESHOLD CONCEPTS The measurement of economic poverty involves two primary components: a budget or threshold below which people are considered poor and an estimate of resources available to people to compare with that threshold. Although the two components work in conjunction with one another—indeed, they need to be defined in a consistent manner in order to have a defensible measure of poverty—for reasons of analysis and presentation we discuss each component in turn. In this chapter we consider concepts for a poverty threshold for a reference family type, including the implications for how that threshold is updated over time. (Chapter 3 discusses adjustments to the reference family threshold for other family types.) We also consider levels for the reference family threshold with which to initiate a new series of poverty statistics under the proposed measure. Analysts often use the terms "absolute" and "relative" poverty thresholds. Absolute thresholds are fixed at a point in time and updated solely for price changes, as is the case for the current U.S. poverty measure. Relative thresholds, in contrast, are updated regularly (usually, annually) for changes in real consumption. Absolute thresholds also generally carry the connotation that they are developed by "experts" with reference to basic physiological needs (e.g., nutritional needs) for one or more budget elements. Relative thresholds, as commonly defined, are developed by reference to the actual expenditures (or income) of the population. For example, a relative measure might set the poverty threshold for a four-person family at one-half the median income or expenditure of families, adjusted for the composition of the population by family type. Relative thresholds are often criticized on the grounds that the choice of the expenditure or income cutoff is arbitrary or subjective rather than reflecting an objective standard of economic deprivation. It is also argued that relative poverty thresholds do not provide a stable target against which to measure the effects of government programs because they change each year in response to real increases or decreases in consumption levels. In practice, however, relative poverty thresholds are not so different from thresholds developed according to expert standards of need: the latter also embody a great deal of relativity and subjectivity. Moreover, it is rare for expert (or other) standards to be maintained in absolute terms (i.e., to be updated solely for

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Measuring Poverty: A New Approach price changes) over long periods of time. The more common experience is that an old standard is replaced after some period of time by a new standard that is higher in real terms. Our review below of poverty threshold concepts begins with an overview of our recommended concept, which leads us also to propose that the current level of the reference family threshold be reassessed (although we do not make a recommendation on the level). We then discuss in detail both expert-based poverty budgets and relative concepts developed both here and abroad. Because expert budgets are typically updated on a sporadic rather than a regular basis, with price adjustments made between realignments, we discuss types of price updating. We also review "subjective" poverty concepts, which derive poverty thresholds from survey questions. Finally, we return to the proposed concept, which is a hybrid of the budget and relative approaches and for which there is support provided by a time series of subjective thresholds developed for the United States. Our conclusions about the threshold concept and the need to reevaluate the level of the current reference family threshold involve considerable elements of judgement. Although judgement enters into nearly all aspects of the poverty measure—from how to value in-kind benefits to how to specify the particular form of an equivalence scale—questions of the threshold concept and level are more inherently matters of judgement than other aspects of a poverty measure. In our deliberations on the threshold concept, we used the criteria we developed in Chapter 1 for a poverty measure—namely, that it be understandable, statistically defensible, and operationally feasible. Also, to the greatest extent possible, we used historical and statistical evidence about the implications of alternative concepts for official poverty statistics in the United States. In this regard, we note that our review was largely limited to poverty measures that, like the current measure, relate to economic or material needs and resources and to threshold concepts that, correspondingly, express the poverty threshold in monetary terms. In other words, we reviewed measures of economic deprivation, in which poverty is defined as insufficient economic resources (e.g., money or near-money income) for minimally adequate levels of consumption of economic goods and services (e.g., food, housing, clothing, transportation). Such measures have been criticized as too narrow in focus, even considered as measures of economic poverty. Townsend (1992:5, 10), for example, comments that people are "social beings expected to perform socially demanding roles as workers, citizens, parents, partners, neighbors, and friends." He argues that economic poverty should be defined as the lack of sufficient income for people to "play the roles, participate in the relationships, and follow the customary behavior which is expected of them by virtue of their membership of society." Toward this end, Townsend (1979, 1992) has

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Measuring Poverty: A New Approach worked to derive a monetary poverty standard that corresponds to low scores on a "deprivation index." Other researchers (e.g., Mack and Lansley, 1985; see also Callan, Nolan, and Whelan, 1992) have developed deprivation indexes to measure socioeconomic deprivation directly—that is, they define socioeconomic poverty as low scores on the index itself. Deprivation indexes commonly include a dozen or more behaviors and types of ownership that are viewed as indicative of full participation in one's society: for example, whether people have certain appliances for household maintenance, new (not second-hand) clothing, access to items necessary for getting and keeping a job (e.g., a telephone or a car or other transportation), or the ability to take a vacation.1 We agree with Townsend and others about the limitations of economic poverty measures as commonly defined. We argue in Chapter 1 for the need for measures of other forms of deprivation. It is important to have direct indicators of such types of deprivation as physical and mental illness, family abuse, unemployment, hunger, homelessness, risk of criminal victimization, and others. It is also important to have measures that characterize the standard of living, such as the extent to which certain types of consumption (e.g., automobiles, televisions) have diffused throughout society (see, e.g., the work of Mayer and Jencks, 1993) or the extent to which people engage in leisure activities. Our charge, however, was to consider the official U.S. poverty measure, which compares economic resources with a monetary threshold for economic consumption. We saw our primary task as twofold—to evaluate the usefulness of the current measure for informing policy makers and the public and to review alternative measures of economic or monetary poverty that could represent an improvement over the current measure. Although we did not do so, we certainly encourage work on measures of other kinds of deprivation, as well as work on measures (such as the Townsend deprivation index) that relate to, but are not the same as, an economic measure of poverty. RECOMMENDATIONS We recommend a revised threshold concept for the official U.S. measure of poverty. Two aspects of the proposed threshold concept need to be kept in mind when comparing it with other concepts: the definition of a reference family and the treatment of nondiscretionary expenses. 1   Sen (1983, 1987) and Atkinson (1985, 1989) discuss the philosophical basis for deprivation indexes that reflect specific, socially influenced types of activities and consumption that are needed to achieve basic capabilities (e.g., literacy, the ability to obtain a job). In the version developed by Mack and Lansley (1985), the index is limited to items that at least one-half of the respondents to a national survey claim to be "necessary" for minimal participation in society, and people who lack a given item because they do not want it are distinguished from people who lack it because they cannot afford it.

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Measuring Poverty: A New Approach The Two-Adult/Two-Child Reference Family We recommend that the poverty threshold concept apply to a reference family of two adults and two children, with the thresholds for other types of families developed by means of a formal equivalence scale that recognizes the different needs of adults and children and the economies of scale for larger families. An alternative approach would be to develop thresholds for each family type on a separate basis, by building up a budget with specific assumptions about scale economies and the needs of different types of family members for each item (e.g., food, housing). The current thresholds were originally developed by Orshansky in this manner, although food was the only budget item specifically determined for each family type. Renwick (1993a, 1993b) also proposes such an approach for constructing budgets for a number of major commodities. This approach, however, involves making many specific judgements about each item and each type of family. Such judgements are inevitably arbitrary (as is evidenced by the anomalies in the current thresholds across family types), and, in our judgement, it is better to have the arbitrariness expressed in a formal equivalence scale. (See Chapter 3 for a detailed discussion of alternative equivalence scales with which to adjust the reference family threshold and methods to adjust the thresholds for geographic area differences in the cost of living.) Any proposed equivalence scale will, of course, produce different thresholds for various types of families than the scale implicit in the current thresholds. Hence, it is desirable for the reference family to fall near the center of the family size distribution rather than at one of the extremes: this tends to reduce the sensitivity to the equivalence scale. Also, it is preferable for the reference family to be one that accounts for a relatively large proportion of the population because its spending patterns observed in a sample survey will be the basis for the poverty thresholds under the proposed concept. The two-adult/two-child family meets these criteria. Although it is no longer the predominant living arrangement in U.S. society, it represents the largest number of people. Of all households (including family households and those headed by unrelated individuals), the single largest type today consists of one-adult households (25% of total households in 1992), followed by married couples with no other family member (22%). The four-person family, comprising a married couple and two other family members, is the third largest household type (13%). However, these four-person families are the modal type in terms of the number of people they represent: in 1992, they accounted for 20 percent of all people, compared with 17 percent for married couples with no other family members, and 10 percent for one-adult households (Rawlings, 1993: Table 16).

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Measuring Poverty: A New Approach Nondiscretionary Expenses In addition to accounting for different needs of families by number of adults and children and geographic area of residence, we recommend that the poverty measure take account of 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, while other families (and individuals) make no such payments, yet the current 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 (see Renwick 1993a, 1993b, for an example of such an approach). We recommend instead that nondiscretionary expenses—which we define as taxes, child care and other work-related expenses, child support payments to other households, and out-of-pocket medical care expenditures (including health insurance premiums)—be deducted from the incomes 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 (see Chapter 4). However, the proposed 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. Updating the Thresholds The major reason, in our view, to revise the threshold concept for the U.S. poverty measure is its implications for updating the thresholds over time. In this regard, it is important to understand the nature of the current poverty measure. As described below ("Expert Budgets"), the method originally used to develop the official thresholds involved taking the cost of a minimum food diet and applying a multiplier that reflected the share of food in the total expenditures of the average family, but that method has never been used to update the thresholds (although its original author, Mollie Orshansky, urged several times that this be done). The thresholds have been updated only for price changes. In other words, the poverty line of about $3,100 for a two-adult/two-child family that was originally set for 1963 has been treated as an absolute standard of need and kept fixed in real terms ever since. Thus, it no longer represents a current estimate of the cost of the food budget times a food share multiplier. In fact, neither the cost of that original food basket nor the food share underlying the multiplier of three has remained constant over time. The share of food in the typical consumer bundle has declined with economic growth, and the cost updating using the overall Consumer Price

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Measuring Poverty: A New Approach Index (CPI) does not necessarily reflect changes in the price of food. Moreover, the composition of the minimum food diet has not been reevaluated on the basis of new information about the food-buying preferences of low-income families. If one believes that it is appropriate to have an absolute poverty line that is updated solely for price changes, there is little need to revisit the threshold concept. However, we believe that to maintain a standard in absolute terms becomes increasingly problematic as living standards change over time. The historical evidence supports the conclusion that poverty standards reflect their time and place. This is true not only when poverty standards are set in an explicitly relative fashion (e.g., as a percentage of median income or expenditures), but also when they are developed according to expert criteria for various needs. Similarly, when surveys ask people questions about minimum income levels, their answers generally reflect prevailing levels of consumption. Hence, we conclude that the relevant question is not whether poverty thresholds should be updated for changes in real consumption, but whether they should be updated on a sporadic or on a regular basis. The former choice would suggest revisiting the standards periodically, perhaps every 10-20 years, and making price adjustments in between major realignments. The latter choice would suggest an automatic mechanism for recalculating the thresholds annually to reflect real consumption changes. We believe that an automatic, regular adjustment is preferable to sporadic adjustments. An automatic adjustment will avoid major breaks in the time series of poverty statistics and also will obviate the controversy that is likely to occur with periodic readjustments.2 A decision to recommend a regular adjustment of the thresholds entails careful consideration of the updating properties of alternative concepts, particularly the implications for the magnitude of the adjustment that is made. We believe that a conservative adjustment is preferable—that is, one that updates them for real growth in consumption of basic goods and services that pertain to a concept of poverty, rather than to update them for real growth in total consumption or income. There is support for a conservative approach from ideas of poverty levels derived from surveys, specifically, those developed on the basis of responses to questions about minimum income amounts needed to "get-along." Over time, such levels have reflected growth in real income but less than proportionately with overall growth (see below). Also, a conservative updating approach will make less of a break with the historical time series. 2   Of course, even an "automatic" updating procedure should be reviewed periodically to determine if it is performing as intended or whether it needs to be modified. Such a review, which would include the data source and methodology, should be part of the regular reviews of the poverty measure that we recommend be carried out every 10 years by the U.S. Office of Management and Budget (see Chapter 1).

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Measuring Poverty: A New Approach A way to implement a regular adjustment of the thresholds would be to return to the original concept for developing the poverty line and apply it afresh each year, namely, determine a minimum food budget and apply a multiplier that is equal to the inverse of the share of food in the total expenditures of the average family. If that procedure was correct for 1963, then it should be correct for every other year. The advantages of this method of updating mirror its initial attractiveness: it rests on a commodity, namely food, that all would agree is a necessary item of consumption; it is understandable ("food times a multiplier"); and it is easy to implement with available consumer expenditure data. However, we believe that its problems outweigh its advantages. One problem is the reliance on experts to determine the minimum food budget. As we show below, judgement inevitably enters into the determination of a poverty level for any basic need, whether food, housing, or anything else. We believe it best if these judgements are introduced explicitly and not with an apparent reliance on experts. A more important problem is the use of only one commodity with a large multiplier and, moreover, a multiplier that reflects total expenditures of the average family. This approach is not conservative with respect to adjusting the thresholds over time because the multiplier, which drives the thresholds, will reflect increased spending on luxuries as well as on basic commodities. In other words, continued application of the original threshold concept is more akin to a completely relative concept, like one-half median family income or expenditures. We sought a concept that would retain the attractive features of the original concept, namely, its understandability and grounding in familiar, basic commodities, but improve on it. Our recommendation is that the reference family poverty threshold be developed by specifying a percentage of median expenditures on the sum of food, clothing, and shelter (including utilities) by two-adult/two-child families in the Consumer Expenditure Survey (CEX), and applying a multiplier to that dollar value so as to add a small amount for other needed expenditures (e.g., personal care, household supplies, non-work-related transportation). This approach builds the budget on three categories of basic goods and services plus a little more, and it uses actual expenditure data directly in the derivation. Having specified a percentage of median expenditures and a multiplier, these values would then be used to update the poverty threshold for the reference family each year on the basis of more recent CEX data. To smooth out year-to-year fluctuations and to lag the adjustment to some extent, we propose to perform the calculations for each year by averaging the most recent 3 years' worth of CEX data, with the data for each of those years brought forward to the current period by using the change in the CPI. Once the threshold is updated for the reference family, the thresholds for other family types can be calculated (see Chapter 3).

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Measuring Poverty: A New Approach The proposed concept has an important advantage for updating the poverty thresholds over time. Historically, spending on food, clothing, and shelter has increased at a slower rate in real terms than has total spending; hence, the proposed updating procedure will tend to update the thresholds in a conservative or a quasi-relative rather than a completely relative manner. However, because the proposed procedure is new, it will be important to evaluate the behavior of the resulting thresholds in relation to the thresholds that would result from a simple adjustment for the change in the Consumer Price Index. RECOMMENDATION 2.1. A poverty threshold with which to initiate a new series of official U.S. poverty statistics should be derived from Consumer Expenditure Survey data for a reference family of four persons (two adults and two children). The procedure should be to specify a percentage of median annual expenditures for such families on the sum of three basic goods and services—food, clothing, and shelter (including utilities)—and apply a specified multiplier to the corresponding dollar level so as to add a small amount for other needs. RECOMMENDATION 2.2. The new poverty threshold should be updated each year to reflect changes in consumption of the basic goods and services contained in the poverty budget: determine the dollar value that represents the designated percentage of the median level of expenditures on the sum of food, clothing, and shelter for two-adult/two-child families and apply the designated multiplier. To smooth out year-to-year fluctuations and to lag the adjustment to some extent, perform the calculations for each year by averaging the most recent 3 years' worth of data from the Consumer Expenditure Survey, with the data for each of those years brought forward to the current period by using the change in the Consumer Price Index. RECOMMENDATION 2.3. When the new poverty threshold concept is first implemented and for several years thereafter, the Census Bureau should produce a second set of poverty rates for evaluation purposes by using the new thresholds updated only for price changes (rather than for changes in consumption of the basic goods and services in the poverty budget). Setting the Initial Threshold Although we recommend a threshold concept and a procedure for updating the poverty thresholds, we do not recommend an initial level with which to initiate a new series of official poverty statistics under the proposed measure.

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Measuring Poverty: A New Approach Specifying a poverty line is the most judgemental of all the aspects of a poverty measure, and we did not think it appropriate for us to make that final, ultimately political, judgement. We do, however, recommend that the level of the current threshold for a two-adult/two-child family be reevaluated in light of both the proposed poverty concept (which treats nondiscretionary expenses as deductions from income rather as elements of the poverty budget) and the increase in the standard of living since 1963, when the current threshold was first fixed in real terms. We also offer a conclusion about what we believe is a reasonable range for the initial reference family threshold. This conclusion is informed by our analysis of thresholds that result from a variety of concepts in the published literature and is consistent with our recommendation to update the thresholds in a conservative manner. We conclude that reasonable values for the starting threshold for a two-adult/two-child family lie in the range of $13,700 to $15,900 (in 1992 dollars). In terms of the proposed budget concept, the lower end of the range can be expressed as 1.15 times the spending on food, clothing, and shelter of two-adult/two-child families at the 30th percentile of the distribution of such spending. The upper end of the range can be expressed as 1.25 times the spending on food, clothing, and shelter of two-adult/two-child families at the 35th percentile of the distribution. In overall terms, the range of $13,700 to $15,900 is 14 to 33 percent higher than the current 1992 reference family threshold, when it is converted (as best as can be done) to the proposed budget concept (i.e., when an amount for nondiscretionary expenditures is removed). The updating that these figures represent is conservative when compared with thresholds developed for 1992 with other approaches and converted to the proposed concept (see below, ''Implementing the Proposed Approach"). RECOMMENDATION 2.4. As part of implementing a new official U.S. poverty measure, the current threshold level for the reference family of two adults and two children ($14,228 in 1992 dollars) should be reevaluated and a new threshold level established with which to initiate a new series of poverty statistics. That reevaluation should take account of both the new threshold concept and the real growth in consumption that has occurred since the official threshold was first set 30 years ago. In the remainder of this chapter we describe in greater detail the nature of and reasoning behind our choice of a poverty threshold concept and procedure for updating the thresholds. We describe the major alternatives, including expert budget concepts, relative concepts, and subjective (survey-based) concepts of poverty. We give our reasons for preferring our recommended approach to the others. We note that other approaches support the appropri-

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Measuring Poverty: A New Approach ateness of regularly adjusting the poverty thresholds for real changes in consumption of basic goods and services. EXPERT BUDGETS Expert-based poverty thresholds, as they have been developed in recent decades, generally derive from one of several approaches that fall along a continuum: expert-defined budget allotments for one or a few categories of expenditures with a large multiplier to allow for other needed expenditures (i.e., the Orshansky multiplier method); expert allotments for a larger number of categories with perhaps a small "other" or miscellaneous category; and expert allotments for a comprehensive, detailed list of budget items (e.g., specific types of clothing instead of clothing as a broad category).3 Thresholds developed in this manner have the appeal of being based on the notion of minimum standards of physical needs. Food is almost always specified in expert budgets since it is biologically required for survival. Emphasis is also typically placed on other goods necessary for survival, such as shelter and clothing. Although expert budgets are generally intended to be derived in an objective manner, with a strong grounding in human physiological requirements, large elements of relativity and subjective judgement invariably enter the process. Thus, for every category for which an explicit budget figure is developed, judgements must be made about the composition of the category and the dollar value that is appropriate for a poverty standard. In a developed country such as the United States, there is usually a wide variety of specific items at varying quality and price levels for any category, almost any of which are adequate for sheer survival. To decide, for example, that a minimally adequate diet must include meat as well as rice and beans and how much of each foodstuff, or that a minimally adequate house or apartment must include at least one bedroom for every two children, is to make a set of judgements that are inevitably influenced by the mores and experiences of the expert's own society. Similarly, to decide what quality of meat (hamburger or ground sirloin) or clothing (polyester or cotton) to price as the poverty standard is to make another set of judgements. Moreover, the people who are defined to be in poverty according to the standards developed by the experts may or may not agree with the experts' choices. Experts can decide to eschew the valuation of a specific item, such as a haircut, in favor of a broader category, "personal care." This approach will reduce the number of specific judgements required, but it will also inevitably 3   The term for expert budgets in earlier literature is "standard budget" (see, e.g., de Neufville, 1975; Orshansky, 1959). The approach of applying a large multiplier to a budget for one or a few categories was originated by Orshansky in her work on the U.S. poverty measure.

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Measuring Poverty: A New Approach rose. Similarly, the food, clothing, and shelter component of the reference family poverty threshold under the proposed concept must be expressed as a percentage of median expenditures on these categories. In the BLS tabulations, "food" included expenditures on food purchased for home use and away from home, excluding nonfood items purchased at grocery stores and alcohol. "Clothing" included expenditures on all kinds of apparel as well as sewing materials. "Shelter'' included rent and, for owners, payments on mortgage interest (but not principal), taxes, and maintenance and repair. (The shelter variable for home owners was defined in this way for processing convenience; a preferable definition would include actual outlays for mortgage payments, taxes, insurance, and maintenance and repairs, together with an imputed amount for the estimated rental value of the home net of such outlays. Such a definition would treat homeowners with low or no mortgage payments in a comparable manner with other homeowners and renters.) "Utilities" included such fuels as natural gas and electricity, telephone, and such public services as water and sewer. Values for every 5th percentile were determined for two-adult/two-child consumer units and selected other family types. Values were also determined by arraying the data for all types of units and converting each unit's expenditures into the equivalent of a two-adult/two-child unit by means of an equivalence scale. For this exercise, two variations of the proposed equivalence scale were used, one with a scale economy factor of 0.65 and the other with a scale economy factor of 0.75, each applied to the number of equivalent adults (the proposed scale treats children under 18 as 0.70 of an adult; see Chapter 3). On the basis of these tabulations, we concluded that it is preferable to work with the expenditure values that result from arraying the sum of each consumer unit's expenditures on food, clothing, shelter, and utilities, constructed from 3 years' worth of data. We had originally liked the idea of building up a budget by taking values from the separate arrays for each of these expenditures. The budget-building approach, however, encounters the problem of zero expenditures on more detailed items, especially using quarterly observations, so we recommend using the sum of these items, which is more robust. We also concluded that it is preferable to use the array for a single reference family type—two-adult/two-child families—even though this procedure considerably reduces the sample size in comparison with the procedure of converting each consumer unit's expenditures to an amount equivalent to a two-adult/two-child family. (The sample size reduction for the 1989-1991 CEX is from 61,385 quarterly observations for all consumer units to 5,485 observations for two-adult/two-child families.) The use of different equivalence scales produces somewhat different percentile values: for example, median expenditures on the sum of food, clothing, and shelter differed by $800 between the two scales that we applied.

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Measuring Poverty: A New Approach More important, changes over time in family composition, such as a continued decline in family size, could change the poverty thresholds in different ways depending on the choice of scale. Yet there is no agreement in the research community on the best form of an equivalence scale. Hence, we believe it is preferable to develop the expenditure array for the same family type each year. In this regard, while the sample size for two-adult/two-child families is adequate for this purpose when 3 years' worth of CEX data are pooled, it would clearly be advantageous to have a larger size for the survey. The final set of percentile values (for each 5% of units) that we examined was derived from arraying the annualized expenditures of two-adult/two-child consumer units on the sum of food, clothing, shelter, and utilities for the period 1989-1991; see Table 2-6, which also shows each percentile value as a percentage of the median. In 1992 dollars, the median value is $15,344.44 The designation of a percentile value for food, clothing, and shelter—which, when expressed as a constant percentage of the median, will drive the poverty thresholds in future years—is obviously a matter of judgement. We do not recommend a specific value or even a range; we do, however, conclude that a reasonable range for the food, clothing, and shelter component of the reference family threshold would be from the 30th to the 35th percentile, or from 78 to 83 percent of the median. In 1992 dollars, this range is from $11,950 to $12,719. What would these amounts buy? Illustratively, a family at the 30th percentile might spend the following: $355 per month or $4,260 annually for food, which is the value of the Thrifty Food Plan for a four-person family; $545 per month or about $6,550 per year for rent and utilities (including telephone) for a two-bedroom apartment, which is the fair market rent in 1992 for such units that is the basis of federal housing assistance; and $95 per month ($24 per family member) or $1,140 per year for clothing. The total per year for a family at the 30th percentile is $11,950. A family at the 35th percentile would spend an extra $64 per month on food, clothing, and shelter, or an extra $770 per year, for a total of $12,720. For comparison, the following are the allotments in two recently developed expert budgets for a two-adult/two-child family (in 1992 dollars): Renwick (1993a): $420 per month or $5,040 per year for food (the value of the Low-Cost Food Plan, which Renwick used used instead of the Thrifty Food Plan—the latter was designed for temporary or emergency use and has never been updated in real terms); $428 per month or $5,136 for housing 44   The 1989-1991 CEX data originally supplied to us were in nominal dollars. We converted the data to constant 1992 dollars by applying the weighted average of the price increases for 1989-1992, 1990-1992, and 1991-1992. A preferable procedure is to adjust the data for each year to the dollars of the year for which the threshold is being calculated before producing the expenditure array.

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Measuring Poverty: A New Approach TABLE 2-6 Percentile Values of Expenditures on the Panel's Basic Bundle by Two-Adult/Two-Child Families, 1989-1991 Consumer Expenditure Survey, in Constant 1992 Dollars, with Multiplier   Basic Expenditures Multiplier of Larger Bundle to Basic Bundle Percentile Dollar Amount Percent of Median Definition 1a Definition 2b 5th 7,041 45.9 1.18 1.20 10th 8,374 54.6 1.22 1.25 15th 9,275 60.4 1.21 1.23 20th 10,188 66.4 1.18 1.19 25th 11,100 72.3 1.18 1.20 30th 11,950 77.9 1.19 1.23 35th 12,719 82.9 1.20 1.26 40th 13,575 88.5 1.15 1.18 45th 14,389 93.8 1.16 1.21 50th (median) 15,344 100.0 1.14 1.17 55th 16,282 106.1 1.17 1.19 60th 17,277 112.6 1.15 1.18 65th 18,369 119.7 1.13 1.16 70th 19,627 127.9 1.15 1.20 75th 20,989 136.8 1.15 1.18 80th 22,521 146.8 1.15 1.18 85th 24,594 160.3 1.13 1.16 90th 27,580 179.7 1.14 1.17 95th 34,094 222.2 1.12 1.16 100th 114,942 749.1 1.09 1.13 NOTES: Data are from tabulations prepared by the Bureau of Labor Statistics from the Interview Survey component of the 1989-1991 Consumer Expenditure Survey; all amounts were converted to 1992 dollars by the CPI-U. The multipliers were derived from the average of families with expenditures on the basic bundle within the range from 2.5 percentiles below to 2.5 percentiles above each 5th percentile level (e.g., the multiplier for the 15th percentile value was derived from the average of families spending between the 12.5 and 17.5 percentiles on the basic bundle). a Definition 1 for the multiplier defines the larger bundle of goods as the basic bundle (food, clothing, shelter, including utilities) plus personal care and one-half of total transportation costs. b Definition 2 defines the larger bundle as the basic bundle plus personal care, education, reading materials, and one-half of total transportation costs. (rent, utilities, and telephone, developed as the 25th percentile of the distribution of rents for all two-bedroom apartments); and $105 per month or $1,260 per year for clothing (developed by adjusting the clothing component of the BLS lower level budget for inflation)—for a total of $11,436 per year on these categories. Schwarz and Volgy (1992): $355 per month or $4,260 per year for food; $554 per month or $6,648 per year for rent, utilities, and telephone for

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Measuring Poverty: A New Approach a two-bedroom apartment; and $90 per month or $1,080 per year for clothing—for a total of $11,988 per year on these categories. The total amounts for both Renwick (1993a) and Schwarz and Volgy (1992)—$11,436 and $11,988—are similar to the value of $11,950 for the 30th percentile of food, clothing, and shelter expenditures from the CEX. The sum of the larger food and clothing allowances in Renwick and the larger housing allowance in Schwarz and Volgy is $12,948, which is higher than the value of $12,719 for the 35th percentile of food, clothing, and shelter expenditures from the CEX. The Multiplier We then considered the multiplier to be applied to the food, clothing, and shelter component of the poverty threshold so as to allow a small fraction for other needed expenditures. BLS developed tabulations for us, from the 1989-1991 CEX Interview Survey, of the ratio of a broader bundle of expenditures to expenditures on the basic bundle. (The multipliers were calculated for families spending around each 5th percentile level on food, clothing, and shelter, from the lowest 5th to the highest 5th.) For our purpose, the definition of the broader bundle always excluded costs that we propose be deducted from family resources instead of included in the thresholds (e.g., child care and out-of-pocket medical care expenditures; see Chapter 4). We also excluded some other costs in order to implement our recommendation for a small fixed multiple applied to a larger basic budget. The Interview Survey may seem ill-suited for constructing a multiplier because it excludes such items as household cleaning supplies and some types of personal care items that one might think should be included in a poverty budget (e.g., shampoo and soap). (These items are picked up in the Diary Survey of the CEX, which we could not analyze.) But our purpose was not to mimic the type of detailed budget-building exercise followed by BLS in the Family Budgets Program or more recently by Renwick and Bergmann (1993) and Schwarz and Volgy (1992). Rather, we wanted to get a rough idea of what could constitute a fairly lean multiplier applied to a larger budget for food, clothing, and shelter. With the available Interview Survey data, we looked at several alternative definitions of a broader bundle, including a definition (1) that included the basic bundle plus personal care items and one-half of total transportation costs, and a definition (2) that included the basic bundle plus personal care items, education expenses, reading materials, and one-half of total transportation costs. We arbitrarily chose to exclude one-half of transportation costs because the Interview Survey does not distinguish between work expenses, which we propose to deduct from resources, and personal transportation for errands, vacations, etc.45 Our calculations showed that multipliers for two-adult/two- 45   In fact, it appears that the federal statistical system does not anywhere provide information on the allocation by families of transportation costs for work and nonwork uses. One estimate prepared for us by the Energy Information Administration, based on automobile and truck usage only, suggests that the allocation might be one-third work and two-thirds nonwork uses (letter from Lynda T. Carlson to the panel, 1994).

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Measuring Poverty: A New Approach child families at or below the median level of expenditures on the basic bundle varied from 1.14 to 1.22 for the first definition and from 1.17 to 1.26 for the second definition (see Table 2-6). We concluded that a reasonable range for the multiplier to apply to the food, clothing, and shelter component of the reference family poverty threshold is 1.15 to 1.25. If the amount for food, clothing, and shelter is $11,950-$12,720 per year (in 1992 dollars), then a multiplier in the range of 1.15-1.25 will provide an added $1,790-$3,180 per year, or about $150-$265 per month, for all other consumption.46 For comparison, the implicit multipliers on food, clothing, and shelter in some expert poverty budgets for two-adult/two-child families (after excluding those expenditures that we propose to deduct from resources) range from 1.14 to 1.30: 1.14, covering personal care, household supplies, and non-work-related transportation (Renwick, 1993a); 1.29, covering personal care, household furnishings and operations, non-work-related transportation, reading, recreation, alcohol, tobacco, education, and miscellaneous (Bureau of Labor Statistics, 1982: Table 1);47 and 1.30, covering personal care, household supplies, non-work-related transportation, and such incidentals as newspapers, stamps, stationery (Schwarz and Volgy, 1992). The Basic Bundle and Multiplier Together On the basis of our review of CEX data, we concluded that a reasonable range for the initial poverty threshold for a two-adult/two-child family is $13,700 to $15,900 (in 1992 dollars). The lower end of this range is the value of the 30th percentile of expenditures on food, clothing, and shelter (or 78% of the median) times 1.15; the upper end of the range is the value of the 35th percentile of expenditures on food, clothing, and shelter (or 83% of the median) times 1.25 (both rounded to the nearest $100). Of course, it would be possible to obtain an initial reference family threshold within the same range with a higher (lower) value for food, clothing, and shelter and a lower (higher) value of the multiplier. We cannot claim scientific backing for the ranges of values that we conclude are reasonable for these two parameters, or for the range for the initial poverty threshold itself. We can point to the reasonableness of the ranges we suggest both in terms of 46   The amount for the 1.15 multiplier in Chapter 1 is shown as $1,750 instead of $1,790 per year because that is the amount when the lower end of the suggested range is rounded down to the nearest $100. 47   This estimate of the multiplier is for the BLS lower level budget, which was about two-thirds of the intermediate budget and not intended to represent a poverty level.

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Measuring Poverty: A New Approach what these amounts would buy and in comparison with other thresholds (see below). However, it should be clear that building a poverty threshold on food, clothing, and shelter plus a little more does not imply that families must spend their income accordingly. Families may spend less on food, clothing, and shelter than implied in the poverty threshold and not necessarily be poor. They may, for example, grow some of their own food or make some of their own clothing in order to increase their available income for other spending. They are poor only if their total income (net of nondiscretionary expenses) is below the poverty line. Conversely, families may spend more on food, clothing, and shelter than implied in the poverty threshold and yet still be poor if their net income falls below the poverty line. The proposed threshold concept is not intended to mandate a spending pattern for low-income people but to lead to an initial threshold that is reasonable for purposes of deriving poverty statistics. More important, that concept is intended to provide a method for updating the initial threshold that takes account of real increases in consumption for basic necessities—food, clothing, and shelter—that pertain to an economic measure of poverty. Comparison with Other Thresholds The range of $13,700-$15,900 that we concluded is reasonable for the initial reference family threshold is 96-112 percent of the official 1992 two-adult/two-child threshold of $14,228. The range is lower than other recently developed thresholds (see column 2 of Table 2-5, above). It would appear that it does not represent much, if any, updating of the current threshold for real increases in living standards. However, the proposed threshold concept differs from most of the concepts we reviewed by treating some kinds of expenses as deductions from resources rather than including them in the threshold (not only taxes, but also other work expenses and out-of-pocket medical care expenses). To get a better sense of how the range of $13,700-$15,900 relates to other thresholds, we sought a way to convert the current threshold and recently developed thresholds to the proposed budget concept. Data limitations made it difficult to carry out such a conversion, but we developed a procedure that provides a rough approximation. For our analysis of the effects of the proposed measure compared with the current measure (see Chapter 5), we added estimates to the March 1993 CPS of each family's spending on child care and other work-related expenses and out-of-pocket medical care expenses (including health insurance premiums). We estimated the average combined deductions for two-adult/two-child families with after-tax income around the median (using families from 7.5 percentiles below to 7.5 percentiles above the median to increase the sample size).

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Measuring Poverty: A New Approach The ratio of this average to median after-tax income for two-adult/two-child families was 0.84. We then applied this ratio to other thresholds to convert them, approximately, to the proposed budget concept (see Table 1-4 in Chapter 1). For the thresholds developed by Renwick (1993a) and Schwarz and Volgy (1992), we made the conversion by inspecting their budgets. We note that the ratios of the "as converted" to the "as developed" amounts in Table 1-4 for the Renwick and Schwarz and Volgy budgets are 0.74 and 0.82, respectively. These ratios are lower than the ratio we calculated because their budgets assume that every two-adult/two-child family spends the maximum allowance for such items as work expenses. The official 1992 threshold, before conversion to the proposed budget concept, is $14,228, and the range of other thresholds shown in Table 1-4 is $17,200 to $21,800 (rounded to the nearest $100). After conversion, the official threshold is $12,000, and the estimated range of other thresholds is $13,100 to $18,300, or 9 to 53 percent higher than the official threshold. The Renwick budget of $13,100 is an outlier at the low end of the range; four other thresholds (two subjective thresholds, a relative threshold expressed as one-half median after-tax income of four-person families, and the Schwarz and Volgy budget) are clustered between $14,400 and $15,600; two other thresholds (the relative threshold recommended by the Expert Committee on Family Budget Revisions and the lower of the two Weinberg and Lamas multiplier thresholds) are between $16,800 and $17,100; and three other thresholds (variations of the multiplier method that make use of expenditure data) are between $17,400 and $18,300. In comparison, the range that we conclude is reasonable, $13,700-$15,900, is 14 to 33 higher than the official threshold and falls within but toward the lower end of the estimated range of other thresholds.48 Thus, it represents a conservative updating in real terms of the current threshold, consistent with our recommendation. Analysis Over Time The most important aspect of the proposed threshold concept is not so much the threshold that it produces for a designated start-up year, but how it moves that initial threshold over time. Our intent was to recommend a concept and procedure that would update the initial reference family poverty threshold for changes in real consumption but in a conservative manner. Unfortunately, there is no good times series with which to evaluate the likely behavior of the proposed procedure. The National Income and Product 48   The range of 13,700–$15,900 is 37–42 percent of median before-tax income for two-adult/two-child families in 1992 and 45–53 percent of median after-tax income converted as described in the text to the proposed threshold concept. We do not have an exact estimate of the range as a percentage of disposable income defined with all of the adjustments that we recommend (see Chapter 4).

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Measuring Poverty: A New Approach Accounts (NIPA) estimates of personal consumption expenditures (PCE) suggest, as we noted above, that the procedure would work as intended: we estimated the elasticity of the basic bundle with respect to total consumption minus medical care as 0.65. Indeed, we briefly considered the use of the PCE estimates (specifically, the change each year in real expenditures on the basic bundle) to update the initial reference family poverty threshold. The PCE estimates are not suitable for this purpose, however, for two major reasons: they include expenditures by nonprofit institutions as well as households, and while they can be adjusted for population growth, they cannot be adjusted for changes in family size over time. Thus, we turned back to the CEX. The current continuing CEX was initiated in 1980. Consumer expenditure surveys were also conducted in 1972-1973 and 1960-1961 (and at intervals of about 10-15 years back to the turn of the century). The design of the surveys was not the same over time; also, there is evidence of some deterioration in the reporting of expenditures in the CEX in comparison with the NIPA (see, e.g., Gieseman, 1987; Slesnick, 1991a). With so few data points and those of doubtful comparability, it is very difficult to construct a historical time series with which to evaluate the proposed updating procedure. To get a very rough estimate of what a poverty threshold developed with the proposed procedure would look like now in comparison with the one actually developed for 1963, we first adjusted median 1991 CEX expenditures on the bundle of food, clothing, and shelter to correct for the greater extent of underreporting (vis-à-vis the NIPA) in that year than was observed in the 1960-1961 CEX. We then calculated the ratio of median expenditures on the basic bundle by two-adult/two-child families in the 2 years (with data supplied by BLS) and applied this ratio to $14,228, the official poverty threshold as of 1963 in 1992 dollars.49 The result was a poverty threshold of $16,152 in 1992 dollars, representing an increase of 14 percent in the thresholds over the period. This increase compares to a 21 to 24 percent increase in Vaughan's subjective thresholds over about the same period (1963-1993 or 1963-1989; see Table 2-4).50 For the period 1980-1991, BLS provided us with a comparable time series from the CEX (although data for 1986 are missing because of tape storage 49   For want of an alternative, we picked the official threshold, which enjoyed widespread support as the right level for 1963, even though the proposed concept—unlike the original concept—treats some expenses as deductions from family resources. We did not believe it appropriate for this exercise to use the ratio of 0.84 to convert the official threshold to the proposed concept because the spending level on such expenses as child care and out-of-pocket medical care would have differed in 1963 from the level in 1992. 50   The increase over the period 1963-1992 was only 10 percent, but the 1992 subjective poverty line is from a Gallup Poll in which the same respondents were asked the get-along question followed by the poverty question. In contrast, the poverty questions in 1989 and 1993 were administered to respondents who were not also asked the get-along question.

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Measuring Poverty: A New Approach TABLE 2-7 Poverty Thresholds Developed Under Panel's Proposed Procedure, in Constant 1992 Dollars   Single-Year Thresholds 3-Year Moving Averages Year Dollar Amount Percent of Official Threshold Dollar Amount Percent of Official Threshold 1980 14,228 100.0 N.A. N.A. 1981 14,227 100.0 N.A. N.A. 1982 14,537 102.2 N.A. N.A. 1983 14,0739 103.6 14,331 100.7 1984 14,374 101.0 14,501 101.9 1985 15,246 107.2 14,550 102.3 1986 N.A. N.A. 14,786 103.9 1987 14,649 103.0 14,809 104.1 1988 15,134 106.4 14,946 105.0 1989 14,899 104.7 14,892 104.7 1990 15,026 105.6 14,894 104.7 1991 15,219 107.0 15,020 105.6 1992 N.A. N.A. 15,048 105.8 NOTES: Data are from tabulations of the CEX Interview Survey for years 1980-1985 and 1987–1991 provided to the panel by the Bureau of Labor Statistics. Single-year thresholds were constructed by applying the year-to-year change in median expenditures on the sum of food, clothing, and shelter (including utilities) by two-adult/two-child families to the starting threshold of $14,228 (the official threshold in 1992 dollars). Because data are not available for 1986, the 3-year moving-average figure for 1987 is the average of 1985 and 1984; that for 1988 is the average of 1985 and 1987; and that for 1989 is the average of 1987 and 1988. Otherwise, moving-average thresholds are the average of the single-year thresholds for the 3 prior years. Data for 1982–1983 apply to urban families only. problems, and the CEX interviews in 1982-1983 included only urban families because of budget cuts). We needed a starting point for this series and, for want of a better choice, pegged it at the official poverty line. The thresholds produced under the proposed procedure, when using a single year's worth of data, move somewhat erratically, with a small overall increase of 7 percent in real terms between 1980 and 1991; see Table 2-7.51 By comparison, Vaughan's subjective poverty thresholds increased by 8-11 percent over the same period (1980-1993 or 1980-1989; see Table 2-4), and relative thresholds expressed as one-half median after-tax four-person family income increased by 8-14 percent over the same period (1980-1993 or 1980-1989; see Table 2-3). The variations in the thresholds we calculated are likely due in part to 51   Again, because we picked an arbitrary starting point, we updated the thresholds by applying the ratio of the medians for each pair of years, rather than using a percentage of the median times a multiplier.

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Measuring Poverty: A New Approach small sample sizes for two-adult/two-child consumer units in single years of the CEX. Also, it appears that the thresholds are not as responsive to economic ups and downs as are relative and subjective thresholds reviewed above (see Tables 2-3 and 2-4). A reason may be that people at or below the median alter their consumption of other items in response to economic ups and downs before they alter their consumption of the basic bundle of food, clothing, and shelter. Our last calculation was to smooth the thresholds for 1980-1991 by constructing 3-year moving averages for 1983-1992 (see Table 2-7). The smoothed series behaves quite reasonably, increasing slowly but steadily over the period by about 5 percent in real terms. Further Evaluation We strongly believe that the principles underlying the proposed threshold concept and updating procedure are an improvement over both the original concept (food times a large, changing multiplier) and that concept as actually implemented (adjusting the thresholds only for price changes). The proposed concept, in contrast, updates the thresholds for real changes in consumption of a bundle of necessities rather than of all goods and services. The concept also retains a normative cast, with its emphasis on food, clothing, and shelter (plus a little more). We are reasonably confident that the CEX data for implementing the proposed concept and updating procedure will produce thresholds that behave in the intended manner. However, we would obviously have preferred to have a longer time series with which to evaluate the likely behavior of the thresholds. We also would have liked to assess the effects of some methodological improvements that we believe should be made in using the CEX data (e.g., construct annual estimates for each consumer unit, use imputed rent for homeowner shelter expenditures). Finally, we believe that it is very important to improve the underlying data—for example, expanding the sample size of the CEX and reducing the extent of underreporting would make more robust the estimates needed to update the poverty thresholds. More generally, the United States would benefit from improvements in data on consumer expenditures, savings, and wealth, which are needed for many important purposes, including the measurement of poverty (see Chapter 5). One concern with using a continuing survey to update the poverty thresholds is the effects that changes in data quality or other aspects of the survey may have on estimates of the required parameters over time. This concern applies to the proposed concept, which relies on 3 years' worth of CEX data to update each year's reference family poverty threshold. (It also applies to relative concepts that peg the thresholds at, say, one-half median adjusted family income or expenditures, and to subjective concepts that make use of

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Measuring Poverty: A New Approach survey responses about the poverty line or minimum income.)52 In the case of the proposed concept, a change in the quality of reporting of expenditures, whether an improvement or a deterioration in reporting, could alter the time series of poverty thresholds even though the underlying phenomena (i.e., real expenditures on food, clothing, and shelter) had not changed. The possibility of changes in the thresholds occurring as artifacts of fluctuations in reporting or other changes to the underlying CEX data will necessitate careful monitoring of the year-to-year consistency in the survey, A second concern with the proposed concept is how the poverty thresholds behave as the economy moves through the business cycle. To facilitate evaluating the thresholds that are developed by the proposed procedure and their implications for poverty rates, it will be important to generate another, unofficial set of thresholds and rates based on them for some time. This other set should represent an initial set of thresholds (developed as we have outlined for the reference family and adjusted appropriately for different types of families and areas of the country) that are updated for price changes rather than for real changes in basic consumption. We believe that tying the thresholds to changes in consumption of the basic necessities of food, clothing, and shelter, together with the use of 3 years' worth of data to develop each year's reference family threshold, will moderate the sensitivity of the thresholds to changes in the business cycle. However, another unofficial set of thresholds that are updated simply for price changes will ensure that important information is available with which to assess the behavior of the official thresholds at the next regularly scheduled review of the poverty measure. 52   Although not as obvious, the same concern applies to the current concept, which maintains the thresholds unchanged in real terms through an inflation adjustment that is based on a continuing survey of consumer prices. However, the survey that is used to estimate the year-to-year change in the CPI is more robust than the CEX. There is a similar concern with the estimation of family resources for comparison with the thresholds, however they are updated: thus, changes in the quality of income reporting or other aspects of the March CPS could affect the time series of poverty rates under the current measure.