National Academies Press: OpenBook

Measuring Poverty: A New Approach (1995)

Chapter: The Current Equivalence Scale

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Suggested Citation:"The Current Equivalence Scale." National Research Council. 1995. Measuring Poverty: A New Approach. Washington, DC: The National Academies Press. doi: 10.17226/4759.
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Suggested Citation:"The Current Equivalence Scale." National Research Council. 1995. Measuring Poverty: A New Approach. Washington, DC: The National Academies Press. doi: 10.17226/4759.
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Page 163
Suggested Citation:"The Current Equivalence Scale." National Research Council. 1995. Measuring Poverty: A New Approach. Washington, DC: The National Academies Press. doi: 10.17226/4759.
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Page 164
Suggested Citation:"The Current Equivalence Scale." National Research Council. 1995. Measuring Poverty: A New Approach. Washington, DC: The National Academies Press. doi: 10.17226/4759.
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Page 165

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ADJUSTING POVERTY THRESHOLDS 162 F in the range of 0.65 to 0.75. To calculate the actual thresholds, the ratio of the scale value from the formula for each family type to the value for the reference family type is applied to the reference family threshold. 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. To explain the basis for our recommendation, we review types of equivalence scales, including the scale inherent in the official thresholds. In the discussion, we present our reasons for recommending that children be treated as needing 70 percent as much, on average, as adults, and for suggesting a range of 0.65 to 0.75 for the factor used to adjust for economies of scale for larger families. The Current Equivalence Scale During the 1960s, when there was keen interest in developing a poverty measure for the United States, one widely cited measure did not employ an equivalence scale. The 1964 report of the Council of Economic Advisers (CEA) set the poverty line for 1962 at $3,000 for a family (of any size) and $1,500 for unrelated individuals. It is hard to defend the proposition that a family of five can live as cheaply as a family of two, and although some might argue that parents who have chosen to have larger families should not be regarded as poor simply because of that choice, the same can hardly be said of the children, who played no part in their parents' decision. If one is to construct a sensible measure of poverty, some equivalence scale must be used. Mollie Orshansky, working at the Social Security Administration in the early 1960s, developed the poverty measure that was ultimately adopted for official use. Her central poverty threshold for a family of four was about the same as the CEA family threshold of $3,000, but she developed a whole range of thresholds that took family size and composition into account (Orshansky, 1963, 1965a). She thereby defined an equivalence scale, not directly, but by constructing a set of thresholds for different family types. Orshansky's thresholds were derived from looking at food budgets, and the equivalence scale that is implicit in them is a consequence of her judgements about needs for food and other goods. The underpinning for Orshansky's thresholds was the U.S. Department of

ADJUSTING POVERTY THRESHOLDS 163 Agriculture (USDA) Economy Food Plan, which provided the estimated cost of a minimally adequate diet for adults and children of various ages and for families of different sizes. (The latter estimates reflect assumptions about economies of scale on food; see Peterkin et al., 1983.) Orshansky's food budgets were based on the USDA estimates, coupled with assumptions about the ages of the children in each size and type of family. She developed separate budgets for families on the basis of the sex of the family head, the family size, the number of family members under the age of 18, and, for one- and two-person units, the age of the family head (under age 65 or 65 and older). According to the 1955 Household Food Consumption Survey, the average family of three or more spent approximately one-third of its after-tax money income on food. On the basis of this evidence, Orshansky created thresholds for families of three or more by multiplying her estimated food costs by three. She examined families of two separately, however, on the grounds that smaller families are less able to take advantage of economies of scale and so must absorb higher per capita fixed costs. The average family of two spent 27 percent of its income on food, so the multiplier for families of this size was set at 3.70 (1.00/0.27). Without using a food plan and a multiplier, she set thresholds for unrelated individuals, characterized by sex and age, at 80 percent of the corresponding threshold for two-person families.1 This figure implies that two adults can live as well as one person on 125 percent as much income (1.0/0.8). Finally, she took 70 percent of her thresholds as the thresholds for farm families. In 1969 the Bureau of the Budget adopted Orshansky's thresholds (and thereby her equivalence scale) for the official measure of poverty, with the modification that the farm thresholds were raised from 70 to 85 percent of the nonfarm thresholds. In 1981 the nonfarm thresholds were applied also to farm families; the thresholds for families headed by women and men were averaged; and the largest family size category for the thresholds was raised from families of seven or more to families of nine or more. With the exception of these fairly minor changes, the current equivalence scale comes directly from Orshansky's original work. Because of the way it was constructed, the scale has as many categories as the official poverty thresholds and is thus quite detailed. (There are 48 categories at present, reduced from 124 categories prior to 1981.) Most presentations summarize it using weighted averages: see Table 3-1, which expresses the weighted average thresholds for families of size two to size seven relative to the threshold for a single adult under age 65. A key point to note is the essential arbitrariness of the equivalence scale 1 Unrelated individuals aged 15 and older are treated as separate one-person "families" in the U.S. poverty measure. Some of them live alone in their own households, but others live with other people not related to them (e.g., they may board with a family or live with one or more unrelated roommates).

ADJUSTING POVERTY THRESHOLDS 164 TABLE 3-1 Equivalence Scale Implicit in Official Weighted Average Poverty Thresholds for 1992 Family Size Scale Value Relative to a Increment in the Scale for Single Adult (Under Age Each Added Family 65) Member (Relative to Single Adult Under Age 65)a One person under age 65 1.000 0.00 One person aged 65 or over 0.922 -0.08 Two persons, head aged 1.163 +0.16b 65 or over Two persons, head under 1.294 +0.29 age 65 Three persons 1.533 +0.24 Four persons 1.964 +0.43 Six persons 2.273 +0.31 Six persons 2.622 +0.35 Seven persons 2.958 +0.34 SOURCE: Bureau of the Census (1993c: Table A). a The values in this column represent the marginal effect of adding one more person to a family. For example, the figure of 0.24 for a three-person family category is the added amount for the third person, computed as the difference between the aggregate scale values in the first column for three- person families and two-person families relative to the scale value for a single adult. b The value shown is for the increment in the scale for the second person in an elderly family relative to a single adult under age 65. The increment in the scale for a second person in an elderly family relative to a single adult aged 65 or over is 0.24—the difference between the scale values of 1.163 and 0.922. that underlies the current poverty measure. Even if one accepts the scientific validity of the Economy Food Plan—itself a controversial matter since the plan is based on a compromise between expert nutritional advice and actual behavior—the derivation of the thresholds, and hence the equivalence scale, rests on a chain of ad hoc adjustments. The scientific basis for them is elusive or controversial, and, consequently, the scale is largely arbitrary. There are numerous specific criticisms of the current scale, that is, of the way in which the poverty thresholds vary across family types. For example, it seems unlikely that economies of scale in food are similar to those for other goods, especially given the presumption that many economies of scale operate through housing (see Nelson, 1993; Orshansky, 1968a). This criticism was especially pertinent for the pre-1981 thresholds for farm and nonfarm families, in which farm families, because they spend less on food on average than nonfarm families, had lower thresholds. This distinction would make sense only if less is also needed for all necessities other than food, such as clothing and shelter, something for which there is no clear evidence. Although the farm- nonfarm distinction no longer exists, a similar situation occurs for elderly

ADJUSTING POVERTY THRESHOLDS 165 individuals living in one- and two-person units who have somewhat lower thresholds than do the nonelderly because they are assumed to need less food. There are also a number of disturbing irregularities in the current scale. If there are economies of scale as family size increases, then the increment in the scale for an additional person should be lower for larger families. Yet as Ruggles (1990:66) has pointed out, this is not true of the current scale: on a weighted average basis relative to a single adult (as seen in Table 3-1), a second person in a family adds 0.29 to the scale, a third person adds only 0.24, a fourth person adds 0.43, and a fifth person adds 0.31. In some cases, single-parent families have higher thresholds than married-couple families of the same size, implying that children cost more than adults in certain size families. As one example, the child in a two-person single-parent family adds more to the family's costs than does the spouse in a married-couple family: see Figure 3-1, which graphs—separately for married-couple and single-parent families—the increment in the scale for each added family member relative to a single FIGURE 3-1 Equivalence scale implicit in the current poverty thresholds: increment for each added family member (relative to a scale value of 1.00 for a single adult under age 65). SOURCE: Data from Bureau of the Census (1993c: Table A).

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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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