National Academies Press: OpenBook

Measuring Poverty: A New Approach (1995)

Chapter: Setting the Initial Threshold

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Suggested Citation:"Setting the Initial Threshold." National Research Council. 1995. Measuring Poverty: A New Approach. Washington, DC: The National Academies Press. doi: 10.17226/4759.
Page 105
Suggested Citation:"Setting the Initial Threshold." National Research Council. 1995. Measuring Poverty: A New Approach. Washington, DC: The National Academies Press. doi: 10.17226/4759.
Page 106

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POVERTY THRESHOLDS 105 The proposed concept has an important advantage for updating the poverty thresholds over time. Historically, spending on food, clothing, and shelter has increased at a slower rate in real terms than has total spending; hence, the proposed updating procedure will tend to update the thresholds in a conservative or a quasi-relative rather than a completely relative manner. However, because the proposed procedure is new, it will be important to evaluate the behavior of the resulting thresholds in relation to the thresholds that would result from a simple adjustment for the change in the Consumer Price Index. RECOMMENDATION 2.1. A poverty threshold with which to initiate a new series of official U.S. poverty statistics should be derived from 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. 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 purposes by using the new thresholds updated only for price changes (rather than for changes in consumption of the basic goods and services in the poverty budget). Setting the Initial Threshold Although we recommend a threshold concept and a procedure for updating the poverty thresholds, we do not recommend an initial level with which to initiate a new series of official poverty statistics under the proposed measure.

POVERTY THRESHOLDS 106 Specifying a poverty line is the most judgemental of all the aspects of a poverty measure, and we did not think it appropriate for us to make that final, ultimately political, judgement. We do, however, recommend that the level of the current threshold for a two-adult/two-child family be reevaluated in light of both the proposed poverty concept (which treats nondiscretionary expenses as deductions from income rather as elements of the poverty budget) and the increase in the standard of living since 1963, when the current threshold was first fixed in real terms. We also offer a conclusion about what we believe is a reasonable range for the initial reference family threshold. This conclusion is informed by our analysis of thresholds that result from a variety of concepts in the published literature and is consistent with our recommendation to update the thresholds in a conservative manner. We conclude that reasonable values for the starting threshold for a two- adult/two-child family lie in the range of $13,700 to $15,900 (in 1992 dollars). In terms of the proposed budget concept, the lower end of the range can be expressed as 1.15 times the spending on food, clothing, and shelter of two-adult/ two-child families at the 30th percentile of the distribution of such spending. The upper end of the range can be expressed as 1.25 times the spending on food, clothing, and shelter of two-adult/two-child families at the 35th percentile of the distribution. In overall terms, the range of $13,700 to $15,900 is 14 to 33 percent higher than the current 1992 reference family threshold, when it is converted (as best as can be done) to the proposed budget concept (i.e., when an amount for nondiscretionary expenditures is removed). The updating that these figures represent is conservative when compared with thresholds developed for 1992 with other approaches and converted to the proposed concept (see below, ''Implementing the Proposed Approach"). RECOMMENDATION 2.4. As part of implementing a new official U.S. poverty measure, the current threshold level for the reference family of two adults and two children ($14,228 in 1992 dollars) should be reevaluated and a new threshold level established with which to initiate a new series of poverty statistics. That reevaluation should take account of both the new threshold concept and the real growth in consumption that has occurred since the official threshold was first set 30 years ago. In the remainder of this chapter we describe in greater detail the nature of and reasoning behind our choice of a poverty threshold concept and procedure for updating the thresholds. We describe the major alternatives, including expert budget concepts, relative concepts, and subjective (survey-based) concepts of poverty. We give our reasons for preferring our recommended approach to the others. We note that other approaches support the appropriateness

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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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