National Academies Press: OpenBook

Measuring Poverty: A New Approach (1995)

Chapter: The Orshansky Multiplier over Time

« Previous: The Original U.S. Poverty Thresholds
Suggested Citation:"The Orshansky Multiplier over Time." National Research Council. 1995. Measuring Poverty: A New Approach. Washington, DC: The National Academies Press. doi: 10.17226/4759.
Page 110
Suggested Citation:"The Orshansky Multiplier over Time." National Research Council. 1995. Measuring Poverty: A New Approach. Washington, DC: The National Academies Press. doi: 10.17226/4759.
Page 111
Suggested Citation:"The Orshansky Multiplier over Time." National Research Council. 1995. Measuring Poverty: A New Approach. Washington, DC: The National Academies Press. doi: 10.17226/4759.
Page 112
Suggested Citation:"The Orshansky Multiplier over Time." National Research Council. 1995. Measuring Poverty: A New Approach. Washington, DC: The National Academies Press. doi: 10.17226/4759.
Page 113

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POVERTY THRESHOLDS 110 involved judgements that are ultimately subjective in nature.5 As we have seen, the particular judgements were strongly influenced by the spending patterns at that time—of lower income families for the food budgets developed by the USDA and of average-income families for the multiplier. As a consequence, the thresholds were higher in real terms than minimum budgets that were developed earlier in the twentieth century. For example, the Economy Food Plan was more generous in terms of allowed quantities than the food components of minimum budgets that were derived for major American cities between 1906 and 1929; also, the implicit allowance for nonfood items in the Orshansky multiplier was considerably more generous than the allowance in pre-1929 budgets, when incomes were lower and the percentage spent on food was, consequently, higher (Appelbaum, 1977; see also Fisher, 1993). The Orshansky Multiplier over Time The multiplier method developed by Orshansky has been used only once in the history of the official U.S. poverty thresholds—when the thresholds were first derived. The method was never used again to revise the thresholds, although Orshansky and others recommended its use several times (see, e.g., Fendler and Orshansky, 1979; see also Fisher, 1992b). Instead, the thresholds have been kept constant in real terms over the years through a price adjustment. One can argue, in fact, that Orshansky's thresholds were adopted as the official thresholds not because her basic method had such widespread support, but for two other reasons. First, her central threshold for 1963 of $3,100 for a two-adult/two-child family accorded well with other views about the level for a poverty line at the time (see Vaughan, 1993; see also Fisher, 1992b, 1993). Also, unlike a number of other contemporary attempts at developing a poverty measure, she provided a matrix of thresholds that reflected different family circumstances, instead of one threshold for all families and another for unrelated individuals. Thus, the more lasting influence of her work on the official thresholds has been her implicit equivalence scale rather than her basic concept of a minimum food budget times a multiplier. The application of Orshansky's method to update the thresholds would involve two steps: first, revising the food budget to reflect more recent data on the buying patterns of lower income families and, second, recalculating the multiplier. Each of these steps presents some problems. In terms of the food budget, the USDA has revised its food plans several times since it developed the Economy Food Plan in 1961. (In between revisions, it uses changes in the Consumer Price Index for specific food 5 Indeed, we want to acknowledge Orshansky's pioneering efforts in developing a poverty measure that proved broadly acceptable and widely useful. Having struggled with the issues and with the problems of available data, we realize full well the task that she faced.

POVERTY THRESHOLDS 111 categories to update the plan costs.) In 1975 USDA published revised food plans based on data from a 1965-1966 Household Food Consumption Survey and revised recommended dietary allowances (RDAs) from the National Research Council.6 The lowest cost plan was renamed the Thrifty Food Plan. In 1983, USDA published a revision of the Thrifty Food Plan based on data from the 1977-1978 Nationwide Food Consumption Survey, further revisions to the RDAs, and new information about the nutrient content of various foods. For the 1975 and 1983 Thrifty Food Plans, however, USDA relied much less heavily than in the original Economy Food Plan on the food-buying patterns of lower income households. Instead, it gave greater weight to cost constraints, namely, a decision to keep the costs of each revision about the same in real terms as the costs of the previous plan. This decision was made because a revised plan reflecting newer data on food-buying patterns would have resulted in a considerable cost increase (24% for the 1983 plan), and the Economy and then Thrifty Food Plan had been mandated as the basis for benefit allotments under the Food Stamp Program, so cost increases would have affected program costs to an extent that was viewed as unacceptable (Peterkin et al., 1983; Greger, 1985:3-4; Orshansky, 1986; see also Ruggles, 1990:179-180). Thus, changes in the mix of foodstuffs in the plan for reasons of nutrition or variety were made to stay within these cost limits. In terms of real dollar costs, the Thrifty Food Plan has been held about constant over time. We estimated the effects on the reference family poverty threshold of implementing the Orshansky approach for selected years from 1950 to 1992, expressing the results in constant 1992 dollars; see Table 2-1.7 We first determined the share spent on food (consumed at home and away from home) in each year by four-person families as a percentage of their total after-tax expenditures and the corresponding multiplier (the inverse of the share). We then determined the ratio of the multiplier in each year to the multiplier in 1960 and applied that ratio to the official poverty threshold in 1992 dollars for a two- adult/two-child family.8 By definition, the official threshold and the 6 The RDAs are based on the scientific findings of nutritional research, but they also involve judgement. 7 We used 1992 as the reference year because our analysis of the effects on poverty rates of implementing the proposed measure used 1992 income data from the March 1993 Current Population Survey (see Chapter 5). 8 We did not take the more straightforward approach of simply applying the multiplier we derived for each year to the food budget (i.e., one-third of the official threshold) because the multiplier in 1960 from CEX data was higher than that used by Orshansky from the 1955 USDA survey (4.56 for four-person families or 4.12 for all families, compared with her multiplier of 3.00 for families of three or more persons). Hence, to apply each year's multiplier as is would overadjust the thresholds relative to the change in the multiplier that occurred over the 1960-1992 period (the multiplier for four-person families increased from 4.56 in 1960 to 6.62 in 1991); see Table 2-1 for sources.

POVERTY THRESHOLDS 112 TABLE 2-1 Comparison of Updated Poverty Thresholds for a Two-Adult/Two-Child Family Using the Orshansky Multiplier, the Official Threshold, and Two Relative Thresholds, 1950-1992, in Constant 1992 Dollars Year Official Orshansky One-Half Four-Person Threshold Multiplier Median Family Threshold a Income Before-Taxb After-Taxc Dollar Amount 1950 14,228 11,681 10,697 10,106 1960 14,228 14,228 14,919 13,030 1963 14,228 14,228 16,364 14,120 1972–1973 14,228 16,874 21,661 18,236 1980 14,228 16,163 20,715 16,629 1989 14,228 20,659 23,062 18,990 1991 14,228 20,659 22,174 N.A. 1992 14,228 N.A. 22,308 18,018 Percent of Official Threshold 1950 100.0 82.1 75.2 71.0 1960 100.0 100.0 104.9 91.6 1963 100.0 100.0 115.0 99.2 1972–1973 100.0 118.6 152.2 128.2 1980 100.0 113.6 145.6 116.9 1989 100.0 145.2 162.1 133.5 1991 100.0 145.2 155.8 N.A. 1992 100.0 N.A. 156.8 126.6 NOTES: The official 1992 threshold for a two-adult/two-child family (which, in constant 1992 dollars, applies to all earlier years) from Bureau of the Census (1993c: Table A). a Based on calculating the share of food in the total after-tax expenditures of four-person consumer units, determining the multiplier (the inverse of the share), calculating the ratio of the multiplier in each year to that in 1960, and applying the ratio for each year to the official 1992 poverty threshold. The procedure assumes that the cost of the food component of the threshold remained constant in real terms and that Orshansky would have used the same food share and multiplier for a base year of 1960 as she did for her base year of 1963. Food shares and multipliers were obtained for 1960, 1972, 1980, and 1991 from tabulations provided to the panel from the 1960-1961, 1972-1973, 1980, and 1991 Consumer Expenditure Survey by the Bureau of Labor Statistics. The food share and multiplier for 1989 are assumed to be unchanged from 1988 (from Bureau of the Census, 1991: Table 718 for four-person consumer units). The food share and multiplier for 1950 relative to 1960 were derived by comparing food shares for these years for all urban families from Bureau of the Census (1975:323). b For 1950, 1960, 1963, 1973, and 1989, calculated from Vaughan (1993: Table 1); for 1991 and 1992, calculated from Bureau of the Census (1993b: Table 13). All amounts were converted to 1992 dollars using the CPI-U (the CPI for urban families; from Bureau of the Census, 1993c: Table A-2). c For 1950, 1960, 1963, 1973, and 1989, calculated from Vaughan (1993: Table 1), who estimated taxes for a two-adult/two-child family; for 1992, calculated from the March 1993 Current Population Survey; all amounts were converted to 1992 dollars using the CPI-U.

POVERTY THRESHOLDS 113 threshold as we calculated it are the same for the base year for Orshansky's original work.9 There are at least two ways of expressing the comparison between columns 1 and 2 of Table 2-1. First, since the method of setting the threshold was applied only once, the base year for which it was applied is critically important. If the official poverty level had been defined for 1950 instead of for 1963, the threshold would have been considerably lower than it is—about 18 percent lower —throughout the past 40 years. Yet if the official level had been defined for 1972-1973 instead of for 1963, using the identical logic and relevant data, the threshold would have been consistently higher than it is—about 19 percent higher —throughout the past 20 years.10 Thus, pegging the threshold at one point in time —whether 1950, 1963, or 1972-1973—and then only updating for price changes means that the level of the threshold will be affected by the historical accident of the base year for which it is set. Second, if the method of setting the threshold had been applied annually or periodically, the threshold would have risen dramatically as real income rose over the past 40 years. That is, the application of the same method for 1950 and for 1991 would have yielded a reference family poverty threshold of $11,681 for 1950 and $20,659 for 1991. Even if the method for determining the poverty threshold for 1963 is considered flawless, there is no logical argument why 1963 was the historically correct time at which to apply that method to set a level for all years thereafter. Yet to apply that same method in subsequent years would have had a very large impact on the threshold. So one is faced with the uncomfortable conclusion that the current U.S. poverty threshold today cannot be right: if it was right for 1963, a year selected by historical accident, then it cannot also be right today. For comparison purposes, we also developed two sets of relative thresholds (drawing on Vaughan, 1993): one set represents one-half the median before-tax four-person family income and the other set represents one-half the median after-tax four-person family income (see Table 2-1). Both thresholds are considerably below the 1950 equivalent of the official threshold (by 25-29%), while they are reasonably close to the official threshold for 1963 (the before-tax threshold is 15% above and the after-tax threshold is 1% below the official threshold for that year). Subsequently, both relative thresholds exceed 9 That year was 1963; for our calculations, we assumed that the multiplier she used would have been the same for 1960 as for 1963. 10 These percentage increases are somewhat higher than would result from applying an estimate of the change in the food multiplier to poverty thresholds that were updated by the change in the cost of the Economy/Thrifty Food Plan instead of the CPI (see below). However, they are lower than would result from applying an estimate of the change in the food multiplier to poverty thresholds based on an update of the Economy/Thrifty Food Plan to reflect new data on food-buying patterns of lower income families.

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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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