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Measuring Poverty: A New Approach (1995)

Chapter: Marginal Effects

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Suggested Citation:"Marginal Effects." National Research Council. 1995. Measuring Poverty: A New Approach. Washington, DC: The National Academies Press. doi: 10.17226/4759.
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Page 266
Suggested Citation:"Marginal Effects." National Research Council. 1995. Measuring Poverty: A New Approach. Washington, DC: The National Academies Press. doi: 10.17226/4759.
×
Page 267
Suggested Citation:"Marginal Effects." National Research Council. 1995. Measuring Poverty: A New Approach. Washington, DC: The National Academies Press. doi: 10.17226/4759.
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Page 268

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EFFECTS OF THE PROPOSED POVERTY MEASURE 266 Finally, in contrast to the pattern for all other groups, measure 2 decreases poverty for five-person and larger families by 1 percentage point compared with measure 1. (See below for further discussion of equivalence scale effects.) Marginal Effects This section considers the effects of the individual components of the proposed poverty measure, including the various adjustments to both the thresholds and the family resource definition. We show why, for example, the proposed poverty measure increases the poverty rate for people in working families and decreases the rate for people in welfare families. Table 5-9 shows the marginal effect on the rate for specific groups of making each of the following changes in isolation: the adjustment to the thresholds for geographic area differences in the cost of housing, the use of a 0.75 scale economy factor, the use of a 0.65 scale economy factor, adding the value of in-kind benefits to income, subtracting out-of-pocket medical care expenses from income, subtracting income and payroll taxes from income, subtracting child care expenses from income, and subtracting other work-related expenses from income. Not shown is the marginal effect of a particular reference family threshold or the net interaction effect.12 The adjustment to the thresholds for area differences in the cost of housing increases the overall poverty rate by a negligible amount (see Table 5-9, first column). This result is expected because the housing cost adjustment is an index with values higher and lower than 1, which should approximately balance out overall. By region, the housing cost index has marked effects, increasing the poverty rate in the Northeast by 2 percentage points and in the West by 1.7 percentage points (all figures are standardized). In contrast, the housing cost index decreases the poverty rate in the South by 1.1 percentage points and in the Midwest by 0.8 percentage point. The housing cost index has negligible effects on the poverty rate for other groups, with the exception of Hispanics, who reside disproportionately in East and West coast cities with higher-than-average housing costs; the index increases their poverty rate by 1.1 percentage points. The use of an equivalence scale with a scale economy factor of 0.75 reduces the overall poverty rate by 0.7 percentage point. In contrast, the use of a scale economy factor of 0.65 has almost no effect on the poverty rate. The 11 In 1992, 31 percent of the elderly lived alone (compared with 12 percent of all people age 15 and older); another 54 percent lived with a spouse (Bureau of the Census, 1993d: Table 71). Note that the category of one-person ''families" or unrelated individuals includes those living with other unrelated individuals in a larger household, as well as those living alone. 12 For the total population, as noted above, the marginal effect of a $14,800 reference family threshold (compared with the current threshold of $14,228) is to increase the overall poverty rate by 0.7 percentage point; the net interaction effect increases the rate by 1.5 and 1.7 percentage points for alternatives 1 and 2, respectively. In the analysis that keeps the overall poverty rate constant, the marginal effect of a $13,175 reference family threshold (compared with the current threshold of $14,228) is to decrease the rate by 1.2 percentage points; the interaction effect decreases the rate by 0.2 percentage point.

EFFECTS OF THE PROPOSED POVERTY MEASURE 267 effects of the two scale economy factors are similar for most groups, with the exceptions noted above and discussed below. The addition to gross income of values for in-kind benefits has a marked effect on reducing the overall poverty rate—1.7 percentage points. The reduction in the poverty rate from adding the value of in-kind benefits is particularly large for several groups: the elderly, -2.2; Northeasterners, -2.3; and people in welfare families, -2.5. The reduction in the poverty rate from this change to the resource definition is least for people in families without health insurance, -1.1 percentage points. The subtraction from gross income of out-of-pocket medical care expenses (including health insurance premiums) has a large effect on increasing the overall poverty rate—2.1 percentage points. The increase in the poverty rate from this component is particularly large for several groups: people in families without health insurance, 2.9; people in families with workers, 3.0; people in two-person families, 3.2; and elderly people, 3.5. The increase in the poverty rate from this component is less striking for blacks, 1.0; and people in welfare families, 0.5. The subtraction of taxes increases the overall poverty rate by 0.5 percentage point. (The EITC does not fully offset payroll and state income taxes.) The subtraction of child care expenses has a smaller effect (0.3 percentage point), which is expected because this deduction applies only to working families with children in which both parents (or one if there is just one) work and the family pays for child care. The subtraction of other work-related expenses increases the overall rate by 0.8 percentage point. Summing the marginal effects of these three components, the result is an increase in the overall poverty rate of 1.6 percentage points. The increase in the poverty rate from subtracting these three components from income is much less for the elderly, 0.2 percentage point; there is also a smaller-than-average effect for blacks, 1.0 percentage point, and for people in welfare families, 0.4 percentage point. For people in working families, there is a larger-than-average effect: subtracting these three components from income increases their poverty rate by 2.9 percentage points. We do not have a directly comparable estimate of the effect of child support payments on poverty rates. Tabulations prepared for us from the 1990 SIPP panel, which compare aggregate poverty rates under the current measure and under a measure in which child support payments are subtracted from income, indicate that the effect might be to increase the overall poverty rate by about 0.3-0.5 percentage point, similar to the effect of child care expenses. Looking across all of the components provides insight as to why the proposed measure disproportionately affects the poverty rates under alternatives 1 and 2 for some groups relative to the overall increase of 3.6 to 4.5 percentage points. For example, the poverty rate for welfare family members decreases by 1 percentage point (on a standardized basis), although it remains

EFFECTS OF THE PROPOSED POVERTY MEASURE 268 TABLE 5-9 Effect of Individual Components of the Proposed Measure on Percentage Point Changes in the Official Poverty Rates, 1992 Marginal Percentage Point Change in the Poverty Ratea Population Housing Scale Scale In-Kind Group Cost Index Economy Economy Benefits Factor 0.75 Factor 0.65 Total 0.09 -0.73 -0.02 -1.65 Population Age Children under 0.11 -0.33 -0.33 -1.79 18 Adults 65 and -0.03 -2.07 1.26 -2.15 over Race and Ethnicity White 0.01 -0.89 -0.03 -1.61 Black 0.07 -0.49 -0.06 -1.84 Hispanicb 1.12 -0.15 -0.19 -1.68 Family Size One person 0.02 -3.99 -1.58 -1.47 Two persons 0.01 0.40 1.95 -1.42 Three or four 0.15 0.44 0.80 -1.92 persons Five or more 0.09 -0.28 -0.86 -1.60 persons Welfare or Work Status Receiving 0.21 -0.40 -0.02 -2.50 AFDC or SSI One or more 0.03 -0.78 -0.34 -1.66 workers Without Health 0.04 -0.60 -0.25 -1.06 Insurance Region of Residence Northeast 1.98 -0.95 0.04 -2.26 Midwest -0.81 -0.95 -0.11 -1.66 South -1.10 -0.56 0.16 -1.46 West 1.73 -0.69 -0.33 -1.52 NOTE: The poverty rates are for individuals: They are determined on the basis of comparing the income of their family (or one's own income if an unrelated individual) to the appropriate threshold. very high. This occurs because welfare families benefit proportionately more than others from in-kind programs, including health insurance (as reflected in lower out-of-pocket medical care expenses) and are proportionately less adversely affected by taxes and work expenses. Conversely, the rate for working family members increases by a full 7-8 percentage points (on a standardized basis). Such families are proportionately more affected than others by subtracting out-of-pocket medical care costs, taxes, child care, and other work-related expenses. The poverty rate for members of families without health insurance increases by 6 percentage points (on a standardized basis), mainly because there is a proportionately smaller effect for these families of adding values for in-kind benefits and a proportionately larger effect of subtracting out-of-pocket medical

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Measuring Poverty: A New Approach Get This Book
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Each year's poverty figures are anxiously awaited by policymakers, analysts, and the media. Yet questions are increasing about the 30-year-old measure as social and economic conditions change.

In Measuring Poverty a distinguished panel provides policymakers with an up-to-date evaluation of:

  • Concepts and procedures for deriving the poverty threshold, including adjustments for different family circumstances.
  • Definitions of family resources.
  • Procedures for annual updates of poverty measures.

The volume explores specific issues underlying the poverty measure, analyzes the likely effects of any changes on poverty rates, and discusses the impact on eligibility for public benefits. In supporting its recommendations the panel provides insightful recognition of the political and social dimensions of this key economic indicator.

Measuring Poverty will be important to government officials, policy analysts, statisticians, economists, researchers, and others involved in virtually all poverty and social welfare issues.

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