National Academies Press: OpenBook

Measuring Poverty: A New Approach (1995)

Chapter: Recommended Threshold Concept and Updating

« Previous: Threshold Concepts: Assessment
Suggested Citation:"Recommended Threshold Concept and Updating." National Research Council. 1995. Measuring Poverty: A New Approach. Washington, DC: The National Academies Press. doi: 10.17226/4759.
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Page 50
Suggested Citation:"Recommended Threshold Concept and Updating." National Research Council. 1995. Measuring Poverty: A New Approach. Washington, DC: The National Academies Press. doi: 10.17226/4759.
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Page 51
Suggested Citation:"Recommended Threshold Concept and Updating." National Research Council. 1995. Measuring Poverty: A New Approach. Washington, DC: The National Academies Press. doi: 10.17226/4759.
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Page 52

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INTRODUCTION AND OVERVIEW 50 plausible that, if there is a serious depression or even a long-running recession, people will change their views about an appropriate poverty threshold, setting it at a lower dollar figure than previously. Also, a decline in the threshold does not necessarily mean a lower proportion of people in poverty (nor does an increase in the threshold necessarily mean a higher proportion of people in poverty). However, it seems undesirable to have the thresholds fluctuate with yearly ups and downs in the business cycle. From the perspective of public acceptability and also from the view that the poverty level is inherently relative to a particular society, one could argue for using the responses of a representative sample of the population to set the level. In support of this approach, evidence from the Gallup Poll series and other studies show that subjective poverty thresholds tend to track changes in living standards, although on a less than one-to-one basis (i.e., they tend to change in a quasi-relative fashion). However, we believe that methodological problems—such as sensitivity of the results to question wording, large variance in responses—make this approach unsuitable for determining the official U.S. poverty thresholds. There is also the possibility with a public opinion survey that the results could be biased if people realize that their answers could affect the poverty line and thus respond differently than they otherwise would. Recommended Threshold Concept and Updating We propose that a new poverty threshold for the United States be developed as a hybrid of the budget-based and relative approaches. In our view, the poverty-level budget should start with a dollar amount for the sum of three broad categories of necessary goods—food, clothing, and shelter (including utilities). This sum should then be increased by a modest additional amount to allow for other necessary expenditures, such as personal care, household supplies, non-work-related transportation. We selected food, clothing, and shelter because they represent basic living needs with which no one would quarrel. That is, people may quarrel about the need for specific kinds of food, housing, and clothing—such as whether air conditioning is essential—but not about the need for food, housing, and clothing in broad terms. Indeed, the United States has major assistance programs to provide food and housing; there is no clothing program, but clothing allowances historically were separately identified grants under Aid to Families with Dependent Children (AFDC). There are other needs besides these three, of course, but there will be debate about which other goods and services represent necessities (e.g., whether to include reading materials). We believe that the use of a multiplier is a better way to provide an allowance for other needs without having to designate particular goods and services as necessary or unnecessary. A difference in our approach is that we propose to obtain dollar amounts for the budget categories directly from tabulations of actual expenditures,

INTRODUCTION AND OVERVIEW 51 rather than from expert judgements about standards of need. Specifically, we recommend that a new poverty threshold for the reference family be derived by specifying a percentage of median expenditures on the sum of food, clothing, and shelter 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. (CEX data can also inform the selection of the multiplier.) Having specified a percentage of the median 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 below). An important advantage of our proposed threshold concept is its implications for updating over time. Historically, spending on food, clothing, and shelter has increased at a slower rate in real terms than has total spending. We have estimated the elasticity with respect to real total expenditures of real spending on food, clothing, and shelter (including utilities) for the period 1960-1991 at about 0.65: in other words, for each 1 percent increase in real expenditures for all items, we estimate that expenditures on food, clothing, and shelter increased by about two-thirds of 1 percent (see Council of Economic Advisers, 1992: Table B-12). Hence, tying the poverty thresholds to spending levels for these three necessary commodities is a conservative way of updating; it adjusts the thresholds for real increases in consumption of basic goods and services, rather than for all goods and services.12 Supporting the reasonableness of this degree of updating is the evidence that subjective poverty thresholds have an elasticity in the range of 0.65-0.80 with respect to median income: when people are asked in successive years to set a value for a minimum income, their answers reflect changes in living standards but on less than a one-for-one basis (see Figure 1-1). RECOMMENDATION 2.1. A poverty threshold with which to initiate a new series of official U.S. poverty statistics should be derived from 12 One could argue that a completely relative updating procedure is preferable to a "conservative" procedure on the grounds that, over time, "luxuries" become "necessities" (e.g., as in the case of radios and televisions). However, we argue that it is appropriate for a poverty measure to reflect such changes with a lag. An example is modern-day computing technology. Our proposed updating procedure will not immediately reflect the spread of such technology to consumers; however, when the technology becomes so integrated into the American life- style that housing and utilities are reconfigured to accommodate it, our measure will likely pick up that change.

INTRODUCTION AND OVERVIEW 52 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. A concern with an updating procedure that adjusts for real increases in consumption is that the poverty thresholds will be too closely tied to changes in the business cycle. Our proposed updating procedure should moderate such fluctuations, both because of the use of 3 years' worth of expenditure data to calculate the reference family threshold each year and because the updating is tied to the basic necessities of food, clothing, and shelter. The lack of a consistent historical time series of CEX data limited our ability to assess the performance of our updating procedure over the past 30 years. With data available beginning in 1980, however, we were able to determine that our procedure is less sensitive to the business cycle than a completely relative updating procedure (e.g., one-half median income or expenditures). Also, our procedure in fact performed conservatively over this period, in that the thresholds increased in real terms but not as much as thresholds derived in a completely relative manner (see Chapter 2). Nonetheless, for evaluation purposes, we believe it would be useful to produce a second set of poverty rates from the proposed measure in which the thresholds are updated only for price changes. This second set of rates will permit evaluating changes in the official rates, based on updating the thresholds according to our recommended procedure, relative to changes in the business cycle. 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

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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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