National Academies Press: OpenBook

Measuring Poverty: A New Approach (1995)

Chapter: Research Findings on Price Differences

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Suggested Citation:"Research Findings on Price Differences." National Research Council. 1995. Measuring Poverty: A New Approach. Washington, DC: The National Academies Press. doi: 10.17226/4759.
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Page 186
Suggested Citation:"Research Findings on Price Differences." National Research Council. 1995. Measuring Poverty: A New Approach. Washington, DC: The National Academies Press. doi: 10.17226/4759.
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Page 187

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ADJUSTING POVERTY THRESHOLDS 186 The use of a fixed-weight interarea price index avoids the difficult problems of specifying differing regional market baskets, but many formidable definitional and measurement issues remain. One conceptual issue concerns the specification of the market basket for the purpose of adjusting the poverty thresholds: whether to use a basket with items and weights based on the expenditure patterns of typical families, as is done for the Consumer Price Index, or a basket that reflects the spending patterns of families at lower expenditure levels. We believe that a reasonable approach would link the market basket to spending patterns of families with expenditures somewhat below the median. If one assumes that an appropriate market basket is specified, the next set of problems concerns data and measurement. In order to have an adequate fixed- weight interarea price index, the sample of prices must be large enough in each area for reliable estimation, and consistent definitions must be applied for all of the items that are priced (e.g., the same type and quality of new car or winter coat must be priced in the same type of sales outlet in each area). Research Findings on Price Differences Given all of the difficulties noted above, one might be tempted to give up on the task of developing an interarea price index for use in adjusting the poverty thresholds. Arguing for a continued effort to develop a reasonable approach is the evidence we have—admittedly imperfect—of important price differentials across areas. As of fall 1981, the last year for which BLS published the family budgets, the relative cost of the lower consumption budget for a family of four, for urban areas in the 48 contiguous states, varied from about 113 percent of the national average in the San Francisco-Oakland and Seattle-Everett metropolitan areas to 91 percent of the average in nonmetropolitan urban areas of the South (Bureau of Labor Statistics, 1982: Table 4).8 In general, relative costs were higher in metropolitan than in nonmetropolitan areas and in the West and Northeast than in the South. As noted above, a problem with the BLS interarea price index for the Family Budgets Program is that it reflected varying market baskets across regions. Sherwood (1975: Table 1) compared the BLS index with a fixed- weight interarea index for the intermediate (or "standard") budget for fall 1973. He found the same general patterns; however, the relative cost of the standard budget in the South was not quite as low or that in the Northeast quite as high with the fixed-weight index as with the BLS index. BLS has continued to publish consumer price indexes for regions, population 8 Relative costs in Alaska and Hawaii were 146 and 126 percent, respectively, of the national average.

ADJUSTING POVERTY THRESHOLDS 187 size classes of metropolitan areas, and the largest metropolitan areas. However, these indexes can properly be used only to compare rates of change in prices across areas—not price levels—because the data come from a probability sample of prices that is designed to produce the national CPI, and so there is no particular consistency across areas in items that are priced. Trends in price changes across areas over the past decade do suggest, however, that the regional and size-of-place price differentials measured in the old Family Budgets Program still persist and, indeed, may have increased. Thus, from 1983 (when the index in each region equaled 100) to 1992, prices increased by 47 percent in the Northeast and 42 percent in the West, compared with 36-37 percent in the Midwest and South (Bureau of the Census, 1993d: Table 761). ACCRA (formerly the American Chamber of Commerce Researchers Association) publishes a fixed-weight interarea price index that in 1992 covered 300 metropolitan areas across the country.9 The market basket applies to a "midmanagement" rather than poverty budget standard, but the relative cost patterns across areas are similar to those cited for the BLS Family Budgets Program index, although with an even wider dispersion. (In this regard, the BLS index for the higher budget showed similar patterns but somewhat more dispersion than the index for the lower budget.) Some higher cost areas in 1992 according to the ACCRA (1992: Table 1) index were New York City with an index value of 214 (relative to 100 for all areas), Boston with an index value of 137, and Los Angeles-Long Beach with an index value of 130; some lower cost areas were such small urban places as Moultrie, Georgia, with an index value of 87 and Kennett, Missouri, with an index value of 83. Recently, economists at BLS have been reanalyzing the price data that are collected for the CPI for the 30 largest metropolitan areas, Anchorage and Honolulu, and samples of smaller metropolitan areas. In all, price data are collected in 85 geographic areas, most of which are grouped together (for publication) by region and city size class. The object of the reanalysis has been to develop a fixed-weight interarea price index that can be used to compare relative costs across areas, rather than just relative rates of change in prices (Kokoski, 1991; Kokoski, Cardiff, and Moulton, 1992, 1994). The approach uses hedonic regression methods (see below) to determine the contribution of geographic location to the prices of various items. The BLS research is still in progress, and, for purposes of adjusting the poverty thresholds, it would be necessary to expand the price sample to cover rural as well as urban areas and to increase the sample size in urban areas to improve reliability. Nonetheless, the research is very promising. Moreover, the findings to date suggest an interim approach that would be an improvement 9 Participating Chambers of Commerce price items for the index according to standards set by ACCRA.

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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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