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Measuring Poverty: A New Approach (1995)

Chapter: Issues in Deriving Relative Thresholds

« Previous: U.S. Expert Committee on Family Budget Revisions
Suggested Citation:"Issues in Deriving 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 129
Suggested Citation:"Issues in Deriving 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 130

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POVERTY THRESHOLDS 129 based budgets. It also argued that actual consumption levels are the best indicator of living standards and that overall levels of expenditure—rather than expenditure shares on specific items—represent the appropriate focus, given that consumers differ in their preferences and can and do adjust their spending patterns for price changes. The committee recommended that a "prevailing living standard" be established as the median of after-tax expenditures for the reference family of two adults and two children (with the standard for other family types determined by means of an equivalence scale) and that the prevailing standard be updated annually with new expenditure data.26 Three other standards would depend on the prevailing standard: the "social abundance standard" would be 50 percent above the prevailing standard; the ''lower living standard" would be two- thirds of the prevailing standard; and the "social minimum standard" would be one-half the prevailing standard. To make more concrete to the public what levels of living these various standards represented, the committee recommended that breakdowns of expenditures for different family types be developed, corresponding to the total spending level for each standard. Furthermore, the committee recommended that, when possible, illustrations be provided of lists of goods and quantities that could be afforded within each expenditure category. The social minimum standard for a two-adult/two-child family recommended by the committee for 1979 (representing one-half median after- tax expenditures) was $15,584 in 1992 dollars, or 110 percent of the official 1992 two-adult/two-child poverty threshold (Expert Committee on Family Budget Revisions, 1980: Table IV-1). For 1991, the social minimum standard would be $19,987 in 1992 dollars, or 140 percent of the official threshold (Bureau of the Census, 1993d: Table 708).27 Issues in Deriving Relative Thresholds There are a number of issues in deriving relative poverty thresholds from data on family (or household) income (or expenditures) that make them somewhat less straightforward to calculate than might appear. One issue concerns the type of adjustment to make for family size in determining the threshold for the reference family (an equivalence scale is always used to determine thresholds for other family types). Sometimes 50 percent (or another percent) of median income of all families is used as the threshold for a reference four-person 26 The level of the prevailing standard for the reference family as of 1979 was about 105 percent of the BLS intermediate budget for that year, indicating that the BLS expert budget was very close to the median level of spending (Expert Committee on Family Budget Revisions, 1980: Table IV-1). 27 This 1991 figure represents one-half average expenditures of four-person consumer units. Data are not available on one-half median expenditures of two-adult/two-child families.

POVERTY THRESHOLDS 130 family (see, e.g., U.S. House of Representatives, 1985). This approach, however, is problematic for updating the thresholds over time because of changes in household and family composition. Thus, because of declining family size in the United States—from 3.67 people in 1960 to 3.17 people in 1992 —the real median income of all families (beforetaxes) increased by 38 percent over the period 1960-1992, but the real median income of four-person families increased by 50 percent over the same period.28 Another approach is to apply an equivalence scale to the income amounts for families or households in order to develop a per capita equivalent income for the reference family (see, e.g., O'Higgins and Jenkins, 1990; Wolfson and Evans, 1989). This approach takes account of changing household or family size over time but is sensitive to the particular equivalence scale used. Still another approach is to pick a reference family type and base the reference poverty threshold on the distribution of income for those families. A possible drawback to this approach, depending on the data source, is limited sample size because information is used for only one family type. Another issue concerns the definition of income (or expenditures). Occasionally, income is defined in before-tax terms; more typically, an after-tax definition is used, which appropriately reflects the fact that families face different tax burdens. Rarely, however, do relative thresholds take account of other important differences in nondiscretionary expenditures or charges against income. Thus, families who must pay for child care or incur other work expenses to earn income are in a different position from families that do not have those expenses. Although it may seem odd to introduce specific components (e.g., work expenses) into a relative measure, not doing so will distort the comparison of poverty rates among important groups. Similarly, in the absence of national health insurance in the United States, it is important to recognize significant differences among families in their outlays for medical care. Finally, it is important to recognize the receipt of in-kind benefits by some families and not others. Any or all of these adjustments can be made by developing separate thresholds for particular types of families (e.g., working families with and without children and nonworking families) or by developing a disposable money and near-money income definition of family resources. 28 Data for family size figures come from Bureau of the Census (1993d:Table 65); for median family income from Bureau of the Census (1982: Table 16; 1993b: Table 13); for median four-person family income from Vaughan (1993: Table 1) and Bureau of the Census (1993b: Table 13). Comparisons in the text are made with all dollar figures expressed in constant 1992 CPI-U dollars; comparisons with constant CPI-U-X1 dollars would show greater increases, but the same relationship between trends in family and four-person family income. Also note that family (or household) size changes can move in the opposite direction. Thus, average family size increased in the United States from 3.5 persons in 1950 to 3.7 persons in 1965 (Bureau of the Census, 1975:41).

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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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