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Measuring Poverty: A New Approach (1995)

Chapter: Calculating Earnings Capacity

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Suggested Citation:"Calculating Earnings Capacity." National Research Council. 1995. Measuring Poverty: A New Approach. Washington, DC: The National Academies Press. doi: 10.17226/4759.
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Page 430

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APPENDIX C 430 Calculating Earnings Capacity The use of the wage rate as the key determinant of the poverty status of a household unit is very similar to the solution to the problem advocated by Haveman in a series of articles (see Garfinkel and Haveman, 1977; Haveman, 1992, 1993; Haveman and Buron, 1991, 1993). The strategy suggested by Haveman and his colleagues is to estimate the earnings capacity of the adults in the household and to use that capacity, for a person employed in a full-time job minus the costs incurred in having that job, as the estimate of income against which a poverty threshold is compared. As Haveman (1992:12) puts it: "Does a family have the skills and capabilities to earn its way out of poverty were it fully to use them?" If so, the suggestion is to define that family as not in poverty; if not, to define that family as in poverty. This suggestion is quite similar to the suggestion above of relying on the level of the market wage rate (adjusting for the necessary costs of employment) as the measure of poverty status. Haveman has, in fact, implemented his suggestion, using the Current Population Survey (CPS), to estimate the earnings capacity of the families and unrelated individuals in the CPS and then to consider the composition and magnitude of poverty so defined. There can be philosophical differences about whether it is preferable to measure poverty on the basis of the actual income received or the potential income that might be received if the family unit "played by the rules" and worked for pay as much as some other family does. Once the allocation of time becomes a focus, this distinction between actual and potential earnings is relevant. We as a panel have taken no position on the matter of the preferable measure, because we stress a preemptive issue: estimating the wage potential with the precision necessary to implement this method of measuring official poverty in the United States is not yet feasible. Neither the wage rate that might be earned if a job were available, nor the likelihood of finding a job that offered that wage rate for the number of hours preferred by the individual, is a calculation that can easily be made. Thus, we do not take a position on the matter of the relative attractiveness of using a wage rate definition or an actual income definition of family resources. We urge continued research to address this matter, but do not consider it sufficiently resolved to warrant implementation now. A few of the issues not yet resolved—which convinced us that earnings capacity is not yet feasible as an alternative to income for determining poverty status—include the following: (1) Is it preferable to use the actual earnings of those who have full-time earnings or to use an imputed earnings potential for those families as well as for those who have no actual earnings? Imputation is surely necessary for those who do not have actual earnings, but then it is not clear how to link these imputed cases to the many others with full-time or part-time earnings.

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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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