Measuring Poverty A New Approach (1995) / Chapter Skim
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3 ADJUSTING POVERTY THRESHOLDS
3 ADJUSTING POVERTY THRESHOLDS
Pages 159-202
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From page 159... ...
ADJUSTMENTS BY FAMILY TYPE The Concept of an Equivalence Scale Equivalence scales are measures of the relative costs of living of families of different sizes and compositions that are otherwise similar. For example, if a family of two adults can live as well as a family of two adults and two children while spending only two-thirds as much, then relative to the reference family of two adults and two children, the equivalence scale value for a two-adult family is two-thirds.
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From page 160... ...
In the language of"equivalence scales," a single person would need one-quarter as much as a family of four, a married couple without children one-half as much as a family of four, and a family of eight twice as much as a family of four. Most people, including the members of the panel, regard this as an extreme position, since it makes no allowance for the fact that children are different from adults, nor for the economies of scale possible for larger families by sharing kitchens, bathrooms, and bedrooms or by buying products in bulk.
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From page 161... ...
We propose that poverty thresholds for different family types be developed by applying an explicit scale to the reference family poverty threshold. The scale should distinguish the needs of children under 18 and adults but not make other distinctions by age; the scale should also recognize economies of scale for larger families.
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From page 162... ...
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 enters is the following: children under 18 are treated as consuming 70 percent as much as adults on average; economies of scale are computed by talking the number of adult equivalents in a family (i.e., the number of adults plus 0.70 times the number of children)
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From page 163... ...
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.
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From page 164... ...
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)
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From page 165... ...
Cal c' 0.25 ._ a, 0.20 a, it' 0.15 0.10 0.05 o -\N\/ ,! ~'% \ ~ Married-couple family Single-parent family _ 1 1 1 1 1 1 Single person Spouse 1 st child 1st child 2nd child 2nd child 3rd child 4th child 5th child 3rd child 4th child 5h child 6th child Family member 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~.
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From page 166... ...
We prefer a more direct approach that recognizes the arbitrariness by setting an equivalence scale formula directly and transparently and then using it to scale the threshold for a reference family type to derive poverty thresholds for other family types. Alternative Equivalence Scales Although there is wide agreement that different family types should have different poverty thresholds, that children have different needs from adults, and that larger households can benefit from economies of scale by sharing some items of consumption, there is little agreement about how the differences should be measured, and there is a wide range of scales in the literature.
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From page 167... ...
The scale values shown are for a family headed by a nonfarrn white male between the ages of 25 and 34 and living in the Northeast (in Jorgenson and Slesnik, 1987:Table 2)
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From page 168... ...
The scale has not been changed since 1975 because, according to an evaluation study (Greger, 1985:26) , "the superiority of alternate adjustment factors was not clear." The USDA scale, which applies to food consumption only, is more generous for larger families than the BLS scale, which, in turn, is more generous than the scale implicit in the official poverty thresholds (see Table 3-2~.
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From page 169... ...
and used to determine eligibility for many government assistance programs (see Chapter 7~. They are constructed by smoothing the official thresholds for different size families: the resulting implicit equivalence scale counts the first adult as 1.0 and each additional adult or child as 0.35.
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From page 170... ...
In principle, postulating such a rule is not very different from picking a set of arbitrary but plausible values to constitute an equivalence scale, but it is easier to propose and defend a single rule than a whole set of scale values. The use of a single principle guarantees that the scale values for different family types are internally consistent, unlike the scale values implicit in the current official poverty thresholds.
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From page 171... ...
The estimated equation can then be used to calculate what increase in income is equivalent to an additional family member (of various types) , and the equivalence scale values are calculated exactly as above.
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From page 172... ...
Nicholson's argument is a persuasive one, and we do not believe that the food (or necessities) share should be used to calculate equivalence scale values.
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From page 173... ...
The difference ye - yO is therefore the cost of the child, and the ratio of ye to yO is the equivalence scale value for the two family types.
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From page 174... ...
Subjective Scales If it is accepted that equivalence scales are based more on their plausibility than on empirical evidence, there is much to be said for simply asking people what
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From page 175... ...
. Recommended Procedure We do not believe that any of the published methods for adjusting poverty thresholds provide a fully defensible rationale for calculating the kind of equivalence scale that is needed for different family types.
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From page 176... ...
recommends using the square root of family size as an equivalence scale short of extensive revisions in the current scale and, in conversation with the panel, Harold Watts also endorsed this approach. This proposal is a special case of the formula, in which P is unity and F is 0.5: scale value = (A + K)
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From page 177... ...
chose the parameters that minimized the sum of squared deviations of the observed proportional costs of children (the five values in the second column of Table 3-3) from the fitted proportional costs of children expressed in terms of the panel's recommended equivalence scale formula: scale value (A,K)
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From page 178... ...
In addition, it is easy to explain and implement. Finally, the use of a scale formula of this type acknowledges the inevitable arbitrariness in adjusting the poverty thresholds for different family circumstances rather than disguising it .
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From page 179... ...
0 Currente ' ~ Am" Single adult Spouse 1st child 2nd child 3rd child 4th child 5th child Family addition FIGURE 3-4 Altemative equivalence scales: increment for each added family member (relative to a scale value of 1.00 for a single adult)
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From page 180... ...
The range of scale economy factors that we recommend (0.65 to 0.75) produces results that are between the extremes and more consistent across family sized It is because the choice of an equivalence scale cannot avoid arbitrariness that we suggest a range for the scale economy factor, F
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From page 181... ...
By applying the proposed scale to the threshold for the reference twoadult/two-child family, the differences from the current scale are reduced for families in most size categories; see Table 3-4 and Figure 3-5. Specifically, for a given value of the reference family threshold, the proposed scale with a scale economy factor of 0.75 produces very similar thresholds as the current scale for all family size categories except for one-person families, for which it produces a threshold value that is less than 80 percent of that produced by the current scale.
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From page 182... ...
CThe current scale is calculated by converting the official 1992 threshold for each family type to the 1992 threshold for a family of two adults and two children; the thresholds for unrelated individuals and two-adult families are those for people under age 65. ADJUSTMENTS BY GEOGRAPHIC AREA Overview and Recommendations There is wide agreement that it is desirable to adjust poverty thresholds for differences in prices.
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From page 183... ...
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.
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From page 184... ...
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-ofhousing 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)
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From page 185... ...
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.
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From page 186... ...
. 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.
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From page 187... ...
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.)
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From page 188... ...
reported the same finding as in the BLS research that interarea price differences are greater for housing (including utilities) than for other commodities.~° These results, coupled with the fact that housing is such a large component of spending, led us to look for a methodology that could provide a reasonable basis for adjusting the poverty thresholds for interarea housing cost differences.
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From page 189... ...
For rents derived from decennial census data, the sample for estimating the 45th percentile value is somewhat more heterogeneous because it is not possible to exclude public housing units, and there is less information with which to determine housing quality. In 1989, the index values for HUD fair market rents for two-bedroom standard rental units relative to a U.S.
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From page 190... ...
Indeed, from the perspective of adjusting the poverty thresholds, there is an attraction to using the methodology with decennial census data. Although the census database is limited in content, it provides adequate sample sizes and an ability to estimate housing costs on a consistent basis for the entire nation (at least for the census year)
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From page 191... ...
Blackley, Follain, and Lee (1986) , who analyzed data from the 1975 and 1978 Annual Housing Survey to calculate housing cost indexes for 34 metropolitan areas; · Thibodeau (1989)
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From page 192... ...
192 MEASURING POVERTY TABLE 3-5 Hedonic Model Price Indexes for Rent and Rental Equivalence, and. Combined Multilateral Index, Selected Areas, July 1988-June 1989 Index for Index for Combined Area or Population Size Renters Owners Index Rank Northeast New York City 1.216 1.877 1.818 2 New York-Connecticut suburbs 1.404 1.711 1.830 1 New Jersey suburbs 1.329 1.514 1.635 6 Philadelphia-Wilmington-Trenton 1.000 1.000 1.117 13 Boston-Lawrence-Salem 1.326 1.613 1.712 3 Pittsburgh-Beaver Valley 0.726 0.698 0.786 36 Buffalo-Niagara Falls 0.783 0.821 0.903 25 Areas of 500,000-1,200,000 0.987 0.952 1.068 15 Areas of 100,000-500,000 0.786 0.758 0.850 28 Areas under 100,000 0.802 0.912 0.982 21 Midwest Chicago-Gary-Lake County 1.004 1.034 1.143 12 Detroit-Ann Arbor 0.928 0.873 0.985 20 Cleveland-Akron-Lorain 0.758 0.753 0.839 30 Minneapolis-St.
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From page 193... ...
, the index for owners' equivalent rent is substantially higher than the rent index. Discussion What can one conclude from the work to date to develop interarea housing cost indexes?
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From page 194... ...
Not only are housing costs a large component of a poverty budget, but housing cost ~ The national component of the American Housing Survey is conducted every two years and currently includes about 57,000 housing units; the sample is designed to produce national estimates, and the geographic identification made available to users is limited to four regions and central city-suburb and urban-rural classifications. The metropolitan component currently includes samples of about 5,000 housing units in each of 44 metropolitan areas; 11 areas are surveyed each year on a rotating cycle.
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From page 195... ...
For constructing housing cost index values for the purpose of adjusting the poverty thresholds for all families, not just urban families or families in selected areas, we conclude that it is almost a necessity to turn to the decennial census, despite its limited data content. Given a decision to use census data, the HUD methodology for developing fair market rents has appeal.
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From page 196... ...
and Size of Metropolitan Area Region and Population Size Index Value New England (Connecticut, Maine, Massachusetts, New Hampshire, Rhode Island, Vermont) Nonmetropolitan areas Metropolitan areas under 250,000 Metropolitan areas 250,000-500,000 Metropolitan areas 500,000-1,000,000 Metropolitan areas 1,000,000-2,500,000 Metropolitan areas 2,500,000 or more Middle Atlantic (New Jersey, New York, Pennsylvania)
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From page 197... ...
0.617 0.780 0.797 0.868 0.914 1.011 0.713 0.841 0.946 1.090 1.006 N.A. 0.891 0.978 1.041 1.063 1.236 1.492 0.564 0.951 1.492 NOTE: Housing cost indexes calculated Tom 1990 census data on gross rent for two-bedroom apartments with specified charactenstics; index values drawn from the 45th percentile of the gross rent distribution (see text)
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From page 198... ...
There has been interest expressed in adjusting the poverty thresholds for state cost-of-living differences for such purposes as allocating funds to disadvantaged school districts under the Elementary and Secondary Education Act. To compare the set of state index values and our proposed set, we assumed that the index values we originally calculated for each of the 341 individual metropolitan areas and for the nonmetropolitan components of each state were the "truth." We then determined what fraction of the population would be misclassified-relative to the individual metropolitan and nonmetropolitan area index values by using a single index value for the nation as a whole or separate index values for the nine regions (divisions)
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From page 199... ...
Updating the Housing Cost Index The index values for cost-of-housing differences can readily be revised as necessary every 10 years as new decennial census data become available. How 18 For some purposes, it may still be desirable to use state index values to adjust poverty thresholds for differences in the cost of housing (or the cost of living generally)
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From page 200... ...
, including the American Housing Survey, local area CPI shelter cost indexes, and random digit dialing surveys. We encourage an assessment of the appropriateness of the HUD methods for updating the housing cost index values from the decennial census for use, in turn, in adjusting the poverty thresholds.
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From page 201... ...
We discuss issues of needed data improvements for poverty measurement, including improvements in the CEX, in Chapter 5. Before that discussion, in Chapter 4, we consider an appropriate definition of family resources to compare with the poverty thresholds for determination of poverty rates for the nation, geographic areas, and population groups.
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