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ADJUSTING POVERTY THRESHOLDS 183 to the CPI: BLS produces price indexes for a limited number of metropolitan areas, but not for rural areas. Moreover, the BLS indexes are designed to allow comparison of differences in price inflation across areas; they do not permit comparison of price levels across areas. Yet there has been a substantial amount of empirical research on the issue, and we believe that it is important to make at least a partial adjustment for geographic cost-of-living variations. At this stage of knowledge, we recommend that the adjustment be made for the housing component of the poverty thresholds. Research indicates that housing (including utilities) is the item for which prices vary most across the country, and considerable effort has been devoted to estimating interarea housing cost indexes. We believe that data available from the decennial census will support an adequate adjustment for housing cost differences, which we recommend be implemented by size of metropolitan area within nine regions of the country. We recommend research on ways to update the housing cost index values for intercensal years. And we recommend further research, not only on geographic variations in housing prices, but also on cost-of-living differences more generally. Such research should be linked to the priority of improving the U.S. database on household consumption (see Chapter 5). RECOMMENDATION 3.2. The poverty thresholds should be adjusted for differences in the cost of housing across geographic areas of the country. Available data from the decennial census permit the development of a reasonable cost-of-housing index for nine regions and, within each region, for several population size categories of metropolitan areas. The index should be applied to the housing portion of the poverty thresholds. RECOMMENDATION 3.3. Appropriate agencies should conduct research to determine methods that could be used to update the geographic housing cost component of the poverty thresholds between the decennial censuses. RECOMMENDATION 3.4. Appropriate agencies should conduct research to improve the estimation of geographic cost-of living differences in housing as well as other components of the poverty budget. Agencies should consider improvements to data series, such as the BLS area price indexes, that have the potential to support improved estimates of cost-of-living differences. Feasibility and Desirability The feasibility and desirability of adjusting the poverty thresholds for geographic cost-of-living differences has been the topic of repeated discussion and
ADJUSTING POVERTY THRESHOLDS 184 analysis for a long time. A principal impediment to making any such adjustment has been the lack of adequate data, although there are also conceptual and measurement issues to resolve. Some analysts have argued against the whole idea of adjusting the poverty thresholds for area price differences on the grounds that such differences are likely to be offset by income differences and, hence, do not represent real differences in life quality. Indeed, the available data suggest that areas with higher prices are also areas with higher income levels: for example, a cost-of- housing index that we calculated for states correlates highly with state median family income.5 Economic theory suggests that, over the long run, measures of ''quality of life" (taking into account both prices and wage levels) will equalize across areas because people will continually migrate to the more pleasant areas, causing prices to rise and wages to fall (see Bloomquist, Berger, and Hoehn, 1988; Roback, 1982; and Rosen, 1979). The counterargument, with which we agree (see Ruggles, 1990), is that poverty is not measuring the "quality of life" in broad terms, but minimum levels of need. As such, the poverty thresholds should be higher in areas with higher pricesâeven if average incomes are also higher. Also, many spells of poverty are short (see Chapter 6 ), which argues for geographic adjustments of the poverty thresholds because families cannot be expected to quickly change location when they experience a decline in income (see Renwick and Bergmann, 1993, on this point). Given that one wants to adjust the poverty thresholds for geographic price differences, the question is how to do it. It is sometimes suggested that interarea differences in income or wages be used as a proxy for interarea price differences. As noted above, there is a high correlation between area income levels and area price levels; however, income and wages are affected by factors other than prices, and it seems preferable to work toward measuring price differences directly.6 One approach is to measure what it costs in different locations to purchase a fixed market basket of goods, that is, to develop a fixed- weight interarea price index. Under this approach, the same consumption items are included in the market basket for all areas of the country, and the same weight or fraction of the market basket is assigned to each item (e.g., vehicle purchases or winter clothing). Another approach is to price different market baskets in different areas under the assumption that needs differ across areas. For example, the market 5 The rank-order correlation is .893, computed using Spearman's r. We estimated state cost- of-housing indexes for analysis of differences among states in eligibility and benefit standards for the Aid to Families with Dependent Children (AFDC) program (see Chapter 8). 6 The use of interarea differences in income levels could overestimate differences in price levels: for example, the variation in state median family income is wider than the variation that we calculated in a state cost-of-housing index adjusted for the share of housing in the proposed poverty budget; see Table 8-4 in Chapter 8.
ADJUSTING POVERTY THRESHOLDS 185 basket might include more winter clothing or home heating fuel in colder than in warmer climate areas, or the market basket might give a higher weight to vehicle purchase and maintenance costs in rural and other areas that lack public transportation. Such an approach seems to make intuitive sense; however, its implementation quickly leads to a host of difficult and hard-to-defend judgements. For example, higher air conditioning costs in warmer areas may offset lower heating costs; or, car owners in rural areas may get better gasoline mileage that lowers their vehicle use costs. Even harder to develop and justify are the use of different market baskets that reflect consumption differences across regions that are not explained by such factors as climate differences. For example, on the basis of observed interregional differences in food consumption patterns, the BLS Family Budgets Program gave higher weight to less expensive foodsâsuch as lard and porkâ and lower weights to more expensive foodsâsuch as butter and beefâin the budgets for areas in the South relative to the North (see Expert Committee on Family Budget Revisions, 1980; Sherwood, 1975, 1977). Although people in different regions may have different tastes for foods (or other items), it seems dubious to thereby conclude that such differences should be reflected in the market basket for pricing. To do so is to assume that Northerners "require" a more expensive diet than Southerners, or, alternatively, to assume that consumers would be equally satisfied with any one of the market baskets that is priced. We conclude that the fixed-weight type of interarea price index is preferable to an approach that attempts to specify "needed" or "appropriate" differences in area market baskets. In this regard, the Expert Committee on Family Budget Revisions (1980:Chap. VII) recommended that a fixed-weight interarea price index be developed for the BLS family budgets and that the market baskets themselves not vary by area. The Committee found that people trade off housing and transportation costs so that the total for these two items does not vary importantly by region or city size; hence, the Committee recommended against interarea differences in the transportation component of the budget. The Committee also argued that regional differences in food consumption should not be used to develop different food budgets by region. Finally, the Committee suggested that, while estimates could be developed of additional expenditures for utilities and clothing needed for different climates, these estimates should not be reflected in the budgets themselves but rather in tabulations by area of the gross income needed to support the standard budget plus any climate allowance plus state and local taxes.7 7 The Committee initially attempted to estimate area budgets representing equivalent levels of living by trying to find total expenditure levels that were consistent with average spending patterns and with spending enough on food to purchase the USDA Moderate Food Plan; however, the analysis failed to turn up consistent or robust findings.