National Academies Press: OpenBook

Measuring Poverty: A New Approach (1995)

Chapter: International Examples

« Previous: RELATIVE THRESHOLDS
Suggested Citation:"International Examples." National Research Council. 1995. Measuring Poverty: A New Approach. Washington, DC: The National Academies Press. doi: 10.17226/4759.
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Page 126
Suggested Citation:"International Examples." National Research Council. 1995. Measuring Poverty: A New Approach. Washington, DC: The National Academies Press. doi: 10.17226/4759.
×
Page 127

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POVERTY THRESHOLDS 126 But changes in the distribution of income or expenditures below the median can lower the poverty rate even when the median value (and hence the value of the poverty line as a fixed percent of the median) increases. However, there are serious concerns about the behavior of relative thresholds olds over time, not only in periods of economic growth but also in periods of recession or depression, when relative thresholds may decline in real terms. Many people are uncomfortable with a poverty measure that could possibly show a lower poverty rate in a recession that makes everyone worse off or that could fail to show a decrease in the rate in response to a policy change that makes everyone better off, including the poor. While decreases in relative thresholds in real terms will not necessarily lead to decreases in the poverty rate (just as increases in the thresholds in real terms will not necessarily lead to increases in the rate), it may be difficult to explain and justify frequent changes in the thresholds that are not simply a reflection of price changes. International Examples The United States is one of the few developed countries with an official poverty measure (see Will, 1986), but many countries and international organizations have undertaken poverty measurement. Often, individual countries use their benefit standards for public assistance programs as unofficial poverty lines. For comparative work across countries, however, poverty thresholds are often defined in relative terms. Thus, the Social Indicator Development Program of the Organization for Economic Cooperation and Development (OECD) includes an indicator of "material deprivation" in its list of 33 indicators. That indicator defines households facing material deprivation as those with incomes or expenditures below a proportion of median disposable (i.e., after-tax, after-transfer) household income, adjusted for differences in household composition (Organization for Economic Cooperation and Development, 1982). No suggestion is made for the specific proportion of median income below which a household would be considered materially deprived. Work by the European Community to compare poverty rates among member nations has often used relative poverty thresholds. As an example, O'Higgins and Jenkins (1990) at the request of the European Commission worked with consultants from each member country to develop comparable poverty estimates for 1980 and 1985. O'Higgins and Jenkins specified poverty thresholds at 40, 50, and 60 percent of average equivalent disposable income of households. This represents household income adjusted by means of an equivalence scale to produce a threshold for one-person households, with thresholds for households of other sizes developed by means of the same scale.22 22 The adjusting procedure works as follows: if the equivalence scale says that families of four need two (or three) times as much income or consumption to sustain the same living standard as

POVERTY THRESHOLDS 127 The United Kingdom recently began to publish estimates of the proportion of households with incomes below various proportions of average income. Analysts most commonly cite the estimates based on 50 percent of average income, using them in place of the earlier practice of using the welfare benefit ("supplementary benefit") standard as an unofficial poverty line (Johnson and Webb, 1992). In Canada, Statistics Canada has for a number of years published a time series of statistics on the low-income population that is similar to a poverty rate series. The determination of low-income status has been based on a set of "low- income cut-offs" (LICOs), which were developed by means of a hybrid approach that involved a set of quite complex procedures (Wolfson and Evans, 1989). The LICOs were developed by first determining the average expenditure of all families on food, shelter, and clothing as a percent of gross income. To this percentage was added an arbitrary 20 percentage points. Then, log-linear curves were fit between food, shelter, and clothing on one side and before-tax income on the other, taking account of variations in family size and urbanization (size of community).23 Finally, on the basis of these curves, the LICO for each family type that corresponded to the designated proportion of spending on food, shelter, and clothing was determined. The idea behind the LICOs, originally developed by Jennie Podoluk on the basis of a 1959 Survey of Family Expenditures, was that families spending more than the specified proportion on "necessities" (i.e., the average proportion plus 20 percentage points) were constrained in their spending on other items and hence could be considered "lowincome." The LICOs were revised subsequently on the basis of new expenditure data for 1969 and 1978.24 The "straitened circumstances" proportion (i.e., the average plus 20 percentage points spent on food, shelter, and clothing) was estimated at 70 percent of income in 1959, 62 percent in 1969, and 58.5 percent in 1978, thus adjusting the LICOs for changes in real consumption. Between revisions, the LICOs were adjusted for price changes. The approach is a hybrid in that it refers to specific types of goods as necessities but determines the key parameter for the a single person, then the income (or expenditures) of four-person families would be divided by two (or three) to produce a per capita equivalent amount, and so on for other family sizes. Median or average adjusted income for one-person households would then be produced from the distribution of equivalent per capita amounts. This procedure can be adapted to set a reference threshold for any size family. Thus, for a four-person reference family, income amounts for other families would be converted to four-person equivalent amounts (e.g., the income for a single person would be multiplied by two or three, depending on the ratio of the equivalence scale value for a four-person family to that for a single person). 23 This curve-fitting approach is similar to the Engel or iso-prop method of developing equivalence scales; see Chapter 3 for a critique. 24 Most recently, the LICOs were revised on the basis of 1986 expenditure data (see Statistics Canada, 1991: App.).

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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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