National Academies Press: OpenBook

Measuring Poverty: A New Approach (1995)

Chapter: Adjusting the Thresholds - Equivalence Scale

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Suggested Citation:"Adjusting the Thresholds - Equivalence Scale." National Research Council. 1995. Measuring Poverty: A New Approach. Washington, DC: The National Academies Press. doi: 10.17226/4759.
Page 58
Suggested Citation:"Adjusting the Thresholds - Equivalence Scale." National Research Council. 1995. Measuring Poverty: A New Approach. Washington, DC: The National Academies Press. doi: 10.17226/4759.
Page 59

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INTRODUCTION AND OVERVIEW 58 implied in the poverty threshold may (or may not) be poor, depending on their net income compared with the poverty threshold. Just as we have urged the development of indicators of other kinds of deprivation (e.g., physical, social) in addition to the economic poverty measure, it would be useful to have indicators that directly measure inadequate food consumption (including hunger) and inadequate housing (including homelessness). It would also be useful to have tabulations of how people below the poverty threshold spend their income. For this to be possible, improvements must be made in both the expenditure and the income data in the CEX (see below). Adjusting the Thresholds—Equivalence Scale A poverty threshold that is appropriate for one type of family is not necessarily appropriate for another. One difference is that the level of consumption needed for a child is not the same as that for an adult. Also, a larger family enjoys some economies of scale: it can make bulk purchases and use hand-me-down clothing, and although it may need more bedrooms, it does not need more kitchens or living rooms than a smaller family. Adjustments to the reference family poverty threshold to reflect differences in family size and composition are made by applying an "equivalence scale." Unfortunately, there is no research-based consensus about how large the scale economies are for larger families, nor about how much children consume, on average, relative to adults. Hence, there are no clear guidelines for adjusting the poverty threshold for families of different sizes and structures. For family size, if one starts with some benchmark family of a specific size and with some specific expenditure level, there is no completely objective way to determine what level of expenditure by a family of some other size is in fact equivalent in terms of well-being or satisfaction. Thus, there is no way to specify the "scale economy factor" by which the poverty threshold for a reference family should be adjusted for different size families. Yet the magnitude of this factor can have a very large influence on the composition and magnitude of the poverty population.16 At one extreme, no adjustment for family size (i.e., a scale economy factor of 0.0) would give the same poverty threshold for an unrelated individual and for a family of five or more. The implication is that all additional family members beyond the first are completely costless, and the result would surely be to underestimate the extent of poverty for larger families relative to smaller families. At the other extreme, a "full" adjustment (i.e., a scale economy 16 The reader needs to keep in mind that a lower value of the scale economy factor (i.e., closer to zero) means greater scale economies, and a higher value of the factor (i.e., closer to 1.0) means lesser scale economies.

INTRODUCTION AND OVERVIEW 59 factor of 1.0) would result in a poverty threshold for a family of five that is five times as much as the threshold for a single individual. The implication is that there are no economies of scale whatsoever—that each added member costs the family as much as the first member—and the result would be to overestimate the extent of poverty for larger families relative to smaller families. Neither extreme is defensible, and the debate in the research literature can be understood as a debate about the correct level for this factor, somewhere between the two extremes. There is growing consensus, however, that the equivalence scale implicit in the official poverty thresholds is not internally consistent and exhibits an irregular pattern. The inconsistency comes from the fact that the scale is based on the dietary needs of family members even though the economies of scale appear to be different for food and for other goods, like housing or transportation. In addition, the current measure reflects ad hoc adjustments for single people living alone or without other relatives and for two-person families. Finally, the current measure has lower thresholds for single people and couples who are aged 65 or older than for younger single people and couples. We conclude that the equivalence scale that is embedded in the official poverty thresholds should not be retained. We recommend that the scale for the poverty thresholds account for differences between the needs of adults and children under 18 but not further distinguish family members (adults or children) by age or other characteristics. We also recommend that the scale incorporate a scale economy factor to reflect economies for larger families. The equivalence scale should take the following general form: The quantity A is the number of adults in a family; the quantity K is the number of children, each of whom is treated as a proportion P of an adult. Thus, (A + PK) reflects the size of the family in adult equivalents, and F is the scale economy factor that converts these adult equivalents into comparable units in terms of their efficient use of the family's resources. We recommend values for both P and F near 0.70; to be specific, we recommend setting P at 0.70 (i.e., each child is treated as 70% of an adult) and F in the range of 0.65 to 0.75. The result of implementing the formula for the reference family of two adults and two children, with P equal to 0.70 and F equal to 0.75, is an equivalence scale value of 2.5 (3.4 adult equivalents raised to a power of 0.75). To calculate the poverty threshold for any other combination of adults and children, the ratio of the scale value from the formula for that family type to the scale value of 2.5 is applied to the reference family threshold. For example, the scale value for a one-adult/one-child family, with P equal to 0.70 and F equal to 0.75, is 1.49 (the result of raising 1.7 adult equivalents to a power of 0.75). Hence, the poverty threshold for a one-adult/one-child

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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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