National Academies Press: OpenBook

Measuring Poverty: A New Approach (1995)

Chapter: ADJUSTING THE THRESHOLD

« Previous: SETTING AND UPDATING THE POVERTY THRESHOLD
Suggested Citation:"ADJUSTING THE THRESHOLD." National Research Council. 1995. Measuring Poverty: A New Approach. Washington, DC: The National Academies Press. doi: 10.17226/4759.
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Page 7
Suggested Citation:"ADJUSTING THE THRESHOLD." National Research Council. 1995. Measuring Poverty: A New Approach. Washington, DC: The National Academies Press. doi: 10.17226/4759.
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Page 8

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SUMMARY AND RECOMMENDATIONS 7 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). 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. ADJUSTING THE THRESHOLD Given a poverty threshold for a reference family of two adults and two children, the next step is to develop appropriate thresholds for families with more and fewer members and different numbers of adults and children. We recommend that the reference family threshold be adjusted by means of an ''equivalence scale" to determine thresholds for other family types. There is no consensus in the scientific literature on the precise form of an appropriate equivalence scale, although there is agreement on some properties of such a scale and that the scale implicit in the official poverty thresholds is flawed. We recommend that the scale recognize that children under age 18 on average consume less than adults, but that the scale not further distinguish family members by age or other characteristics. We also recommend that the scale add a decreasing amount for each adult (or adult equivalent) family member to reflect economies of scale available to larger families, such as their

SUMMARY AND RECOMMENDATIONS 8 ability to buy food and other items in bulk and jointly use many durable goods. Evidence of cost-of-living differences among geographic areas—such as between metropolitan and nonmetropolitan areas—suggests that the poverty thresholds should be adjusted accordingly, but inadequate data make it difficult to determine appropriate adjustments. As a first and partial step, we recommend that the housing component of the poverty thresholds be indexed to reflect variations in housing costs across the country. This adjustment can be made by analyzing decennial census data with the methodology developed by the U.S. Department of Housing and Urban Development (HUD) to estimate rents for comparable apartments in different localities. We believe the available data support reasonable adjustments for several population size groups of metropolitan areas within each of nine regions of the country. The resulting geographic index should be applied to the housing component of the thresholds. It may also be possible to update the index values each year (rather than at 10- year intervals) by applying the updating methods used by HUD. We do not recommend adjustments for other budget items at this time because good data for such adjustments are lacking and because the available research suggests that variations in the costs of other budget items are not large. However, more research would be very helpful to develop refined methods and data by which to adjust the poverty thresholds more accurately for geographic cost-of-living differences for housing and other goods and services. One source of improved data could be the area price index program of the Bureau of Labor Statistics (BLS). RECOMMENDATION 3.1. The four-person (two adult/two child) poverty threshold should be adjusted for other family types by means of an equivalence scale that reflects differences in consumption by adults and children under 18 and economies of scale for larger families. A scale that meets these criteria is the following: children under 18 are treated as consuming 70 percent as much as adults on average; economies of scale are computed by taking the number of adult equivalents in a family (i.e., the number of adults plus 0.70 times the number of children), and then by raising this number to a power of from 0.65 to 0.75. RECOMMENDATION 3.2. The poverty thresholds should be adjusted for differences in the cost of housing across geographic areas of the country. Available data from the decennial census permit the development of a reasonable cost-of-housing index for nine regions and, within each region, for several population size categories of metropolitan areas. The index should be applied to the housing portion of the poverty thresholds.

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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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