National Academies Press: OpenBook

Measuring Poverty: A New Approach (1995)

Chapter: RELATIVE THRESHOLDS

« Previous: Updating for Price Changes
Suggested Citation:"RELATIVE THRESHOLDS." National Research Council. 1995. Measuring Poverty: A New Approach. Washington, DC: The National Academies Press. doi: 10.17226/4759.
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Page 124
Suggested Citation:"RELATIVE THRESHOLDS." National Research Council. 1995. Measuring Poverty: A New Approach. Washington, DC: The National Academies Press. doi: 10.17226/4759.
×
Page 125

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POVERTY THRESHOLDS 124 CPI-U-X1 and CPI-U for the years before and after 1983 had been used to update the official poverty thresholds, then the threshold for a two-adult/two- child family in 1992 would have been $13,082, or 92 percent of the official threshold for that year. If the poverty thresholds had continued to be updated by the cost of the Economy Food Plan (as occurred prior to 1969), the thresholds would also have increased less than has been the case with the CPI-U: the two-adult/two-child threshold in 1992 would have been $13,072, or 92 percent of the official 1992 threshold.20 The use of a Consumer Price Index specific to the low-income population has sometimes been discussed (see, e.g., King, 1976). Low-income people have different consumption patterns from high-income people: they spend a larger fraction of their budgets on necessities and a smaller fraction on luxury goods. Hence, if the relative prices of necessities and luxuries change over time, as has happened in some periods in the past, the use of the CPI will not give an accurate picture of real adjustments for poor people. In practice, however, the use of a low-income price index would probably not have made much of a difference over the period from 1963 to 1992 taken as a whole. (As we have noted, the cost of the Economy/Thrifty Food Plan increased about as much over this period as the overall CPI-U-X1.) Hence, we believe that work on a low- income price index is not a priority, although circumstances might arise in the future that could make it advisable to investigate the issue further. (To develop a reliable low-income price index could require improvements to both the CEX and the BLS price database.) We note that our proposed updating method has the advantage of relying very little on a price index: the only use of an index is to express the expenditure data for the prior 3 years that will be used to develop each year's reference family threshold in current dollars. RELATIVE THRESHOLDS Relative poverty thresholds—thresholds that are derived from the outset in a relative fashion—are based on comparing the income or consumption of a family to that of other typical families. The relative approach, as commonly implemented, designates a point in the distribution of income or expenditures to serve as the poverty line for a reference family. (Thresholds for other family types are developed by use of an equivalence scale.) Although a relative threshold, once chosen, could be kept constant in real dollars over a period of 20 This is derived from changes in the cost of the Economy and Thrifty Food Plans, 1963-1992: the 1963 cost figure is from Ruggles (1990: Table A.4); the 1992 cost figure is from unpublished tables provided by the Food and Nutrition Service, U.S. Department of Agriculture.

POVERTY THRESHOLDS 125 years (i.e., be turned into an absolute threshold), relative thresholds are usually updated automatically on the basis of new information about the distribution of income or expenditures. The conceptual argument that is often made for relative thresholds is that people are social beings and operate within relationships. Full participation within those relationships and within society requires that they "fit in" with others. Those whose resources are significantly below the resources of other members of society, even if they are able to eat and physically survive, are not able to participate adequately in their relationships, and therefore are not able to participate fully in society.21 A relative approach to deriving poverty thresholds recognizes the social nature of economic deprivation and provides a way to keep the poverty line up to date with overall economic changes in a society. There are several advantages to relative thresholds. First, they are easy to understand and fairly easy to calculate. Indeed, convenience is often as important a reason for choosing a relative approach as is any theoretical argument. The convenience factor is particularly compelling in the case of international comparisons of poverty, for which it can be difficult to develop comparable expert budgets or other types of poverty thresholds for different countries. Second, relative thresholds are explicitly arbitrary. They do not represent any type of budget, but simply a point in the distribution of income or expenditures. That point is usually one-half the median. As we have seen, expert budgets have large elements of relativity and judgement in them, but are typically couched as representing something more objective. Third, relative thresholds are self-updating, so their use avoids the need for periodic—and often controversial—reassessments of budgets or other types of thresholds to determine if they need to be revised for other than price changes. Yet the very advantages that some find in the relative, arbitrary, and self- updating features of relative thresholds are drawbacks to others. For example, some argue that relative thresholds offer too much of a moving target for policy makers attempting to ameliorate poverty. Such arguments can be overstated—it is not, as is sometimes said, impossible to reduce poverty with a relative threshold. If the reference family threshold is defined as a percentile of the distribution of income or expenditures (e.g., the 25th or 35th percentile), that would be true. By definition, 25 or 35 percent of the population is always below the 25th or 35th percentile. However, if relative thresholds are defined as a percentage of the median value (as is commonly done), then it is possible to reduce poverty, and this seems the appropriate approach. Defined in such terms, relative thresholds will move with the median (as, indeed, expert budgets tend to move, although sporadically rather than on a continuous basis). 21 See Townsend (1992) for an argument that poverty has a social as well as a physical dimension and, furthermore, that people evaluate their own situation in relation to others, not by reference to an absolute standard of need.

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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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