National Academies Press: OpenBook

Measuring Poverty: A New Approach (1995)

Chapter: Alternative Indexes

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Suggested Citation:"Alternative Indexes." National Research Council. 1995. Measuring Poverty: A New Approach. Washington, DC: The National Academies Press. doi: 10.17226/4759.
Page 310
Suggested Citation:"Alternative Indexes." National Research Council. 1995. Measuring Poverty: A New Approach. Washington, DC: The National Academies Press. doi: 10.17226/4759.
Page 311
Suggested Citation:"Alternative Indexes." National Research Council. 1995. Measuring Poverty: A New Approach. Washington, DC: The National Academies Press. doi: 10.17226/4759.
Page 312

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OTHER ISSUES IN MEASURING POVERTY 310 Alternative Indexes The head-count ratio has several advantages over other possible indexes of poverty. It enables the continuation of the 30-year time series of annual poverty rates. It is easy to calculate and to understand and is intuitively appealing. The public, as well as policy makers, readily grasp what the number and the proportion represent. Some analysts also argue that it is a relatively easy index to use in forecasting the effects of various public policy proposals, and, as such, is a convenient tool for policy analysis. Our reason for recommending supplements to the head-count ratio is that the amount of information provided by that ratio is limited. Many important changes in the circumstances of the poor are not reflected in it. For example, a transfer made to a poor individual does not change the head-count ratio if the person remains in poverty, even though that person is made better off. Consider a $1,000 transfer to either a family just below poverty or a family far below poverty. In the first case, the transfer may raise that family out of poverty and lower the head-count ratio, thus lowering the poverty index as it is currently measured. In the second case, the same $1,000 transferred to a family far below poverty, and arguably in even greater need, would not lower the head-count ratio if it did not raise the family above the poverty threshold. The head count would still be correct in both cases, but it would not reveal any benefit from the second transfer and would not, therefore, convey a full and accurate picture. In a seminal paper, Sen (1976) asserted that an ideal poverty index should include three elements: (1) the relative number of poor, indicating the incidence of poverty; (2) the average shortfall of the poor below the poverty threshold, indicating the average deprivation of the poor; and (3) the distribution of income among the poor, indicating relative deprivation among the poor. The head-count ratio only satisfies the first of the three criteria, indicating the incidence of poverty. This index does not reveal the average level of deprivation: it provides the same number if all of those in poverty are $1 below the poverty line or if each of them has only $1 of income. Similarly, the head- count ratio does not indicate the distribution of income among the poor. As a result of these shortcomings, the head-count ratio has potential for misuse. For example, programs to reduce poverty that are targeted on those just below the poverty line will reduce the ratio more than programs of the same budgetary cost aimed at the poorest poor people, those far below the poverty line. Sen (1976) and Rodgers and Rodgers (1991), among others, have proposed a list of specific properties by which one might evaluate the appropriateness of any proposed poverty index. One such property is monotonicity: that is, the index should decrease for an income increase of a poor person even if that increase does not move the person across the poverty line (as well as, of

OTHER ISSUES IN MEASURING POVERTY 311 course, if that increase does move the person across the poverty line). Conversely, the index of poverty should increase for an income decrease of a poor person already below the poverty line. The "poverty gap" has this property, as it is a calculation of the difference between the income of the poor and their poverty thresholds. A variety of poverty indexes have been proposed that integrate different combinations of the properties suggested for a good index. For example, a number of alternative indexes can be expressed as normalized weighted sums of the poverty gaps of the poor (e.g., indexes of Clark, Hemming, and Ulph, 1981; Foster, Greer, and Thorbecke, 1984; Kakwani, 1980; Rodgers and Rodgers, 1991; Sen, 1976; Takayama, 1979; Thon, 1979—see also Atkinson, 1989; Blakorby and Donaldson, 1980; and the review by Foster, 1984.) These indexes take into account not only the proportion of the population that is poor and the mean income of the poor, but also the distribution of income among the poor. The statistical advantages of one or another of these indexes as an official poverty statistic, however, must be balanced against possible drawbacks. First, it is imperative that the indexes, like the underlying concept of poverty, have a clear and intuitive interpretation that can be easily understood by those with little or no training in statistics. As Ruggles (1990:29) argues: As the indexes become more and more complex it can be difficult even for analysts who are familiar with them to pinpoint the sources of change from period to period or to predict how alternative indexes will react to specific changes in the distribution of income or consumption. This can be the case even with fairly elementary poverty measures; the situation is greatly exaggerated with more complex measures. In contrast, Kapteyn (1977) argues that as a given measurement is used over time, it gains acceptance and understanding regardless of its complexity. He contends, therefore, that attention should be on the development of the "best" measure rather than the least complex one. Second, as suggested by Atkinson (1989), a poverty index may be satisfactory for certain analytic purposes, even if it does not give unambiguous poverty rankings under all conditions. Kundu and Smith (1983) review a number of poverty indexes and contend that none of them simultaneously meets all the desirable axiomatic properties by which they judged those indexes. Choices clearly must depend on the nature of the poverty index and its intended use. As an example, Hagenaars (1987) suggests that if the poverty line were an absolute boundary between survival and starvation, then the proportion or the number of poor should take priority over all other considerations. We are persuaded that the head count and the head-count ratio are of considerable value and should be continued as the primary measures of poverty in the United States. They are intuitive and easy to calculate, even

OTHER ISSUES IN MEASURING POVERTY 312 though they fall short of many of the properties considered desirable by those with expertise regarding poverty indexes. To compensate for these shortfalls and to provide a more complete picture of poverty, we are equally persuaded that there should be indicators of both the mean income level and the distribution of income among the poor. These indicators, however, should be kept separate from the head-count ratio, again, for reasons of understandability. The Census Bureau already produces estimates of the mean poverty gap (or income deficit) each year for both all poor people and various groups, although it is not an official measure of poverty (see, e.g., Bureau of the Census, 1993c). This index measures the average difference between the poverty threshold and the income of the poor. In addition, the Census Bureau produces estimates of the distribution of income among the poor in terms of the proportion falling below specified fractions of the poverty threshold, such as the proportion below 75 percent or 50 percent. (The Census Bureau also publishes the proportion with incomes near poverty, e.g., those below 125% of the poverty threshold.) Together, these statistics provide understandable information on the average deprivation of the poor and the distribution of income among them. We suggest that the Census Bureau continue to develop such statistics, although we believe that a measure of the average income of the poor would be more useful and understandable than the average poverty gap. Also, for statistics on average income (as well as for the poverty gap), it is most important to compute them by groups as well as for all poor people. This is important because different groups have different poverty thresholds, so that a mean income value of, say, $10,000, has different implications for a group with a poverty threshold of, say, $12,000 than for a group with a threshold of, say, $15,000. In this regard, it would be most useful to publish a weighted average poverty threshold, reflecting the composition of the poor population, to accompany statistics on the average income of the poor.17 Finally, it is important in the text of reports on poverty to point out limitations of specific indexes. We have noted that the head count and head- count ratio (and changes in them) do not provide any information about the underlying mean and distribution of the income of the poor. Similarly, a measure of mean income does not provide information about the income distribution. Also, it is important to caution about drawing unwarranted conclusions from particular indexes—for example, the poverty gap is not a measure of the amount of money that the government would have to spend to eliminate poverty (see Chapter 8, on behavioral responses to government 17 We note that Orshansky (1965a:14), in her original work on the poverty measure, provided exactly this type of information, namely, average income of the poor for groups and average income of the poor for the total population, compared with an average weighted poverty threshold.

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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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