Measuring Poverty A New Approach (1995) / Chapter Skim
Currently Skimming:
2 POVERTY THRESHOLDS
2 POVERTY THRESHOLDS
Pages 97-158
The Chapter Skim interface presents what we've algorithmically identified as the most significant single chunk of text within every page in the chapter.
Select key terms on the right to highlight them within pages of the chapter.
From page 97... ...
Fourth, the concept for the official poverty thresholds is problematic. That concept originally was the cost of a minimum diet times a multiplier to 97
|
From page 98... ...
Although the two components work in conjunction with one another indeed, they need to be defined in a consistent manner in order to have a defensible measure of poverty- for reasons of analysis and presentation we discuss each component in turn. In this chapter we consider concepts for a poverty threshold for a reference family type, including the implications for how that threshold is updated over time.
|
From page 99... ...
The more common experience is that an old standard is replaced after some period of time by a new standard that is higher in real tees. Our review below of poverty threshold concepts begins with an overview of our recommended concept, which leads us also to propose that the current level of the reference family threshold be reassessed (although we do not make a recommendation on the level)
|
From page 100... ...
measure of poverty. Two aspects of the proposed threshold concept need to be kept in mind when comparing it with other concepts: the definition of a reference family and the treatment of nondiscretionary expenses.
|
From page 101... ...
Also, it is preferable for the reference family to be one that accounts for a relatively large proportion of the population because its spending patterns observed in a sample survey will be the basis for the poverty thresholds under the proposed concept. The two-adult/two-child family meets these criteria.
|
From page 102... ...
However, the proposed approach has implications for comparing poverty thresholds across concepts: a reference family threshold developed as we propose will necessarily exclude some expenses that are typically averaged in for all such families. Updating the Thresholds The major reason, in our view, to revise the threshold concept for the U.S.
|
From page 103... ...
Similarly, when surveys ask people questions about minimum income levels, their answers generally reflect prevailing levels of consumption. Hence, we conclude that the relevant question is not whether poverty thresholds should be updated for changes in real consumption, but whether they should be updated on a sporadic or on a regular basis.
|
From page 104... ...
We sought a concept that would retain the attractive features of the original concept, namely, its understandability and grounding in familiar, basic commodities, but improve on it. Our recommendation is that the reference family poverty threshold be developed by specifying a percentage of median expenditures on the sum of food, clothing, and shelter (including utilities)
|
From page 105... ...
RECOMMENDATION 2.3. When the new poverty threshold concept is first implemented and for several years thereafter, the Census Bureau should produce a second set of poverty rates for evaluation purposes by using the new thresholds updated only for price changes (rather than for changes in consumption of the basic goods and services in the poverty budget)
|
From page 106... ...
and the increase in the standard of living since 1963, when the current threshold was first fixed in real terms. We also offer a conclusion about what we believe is a reasonable range for the initial reference family threshold.
|
From page 107... ...
Experts can decide to eschew the valuation of a specific item, such as a haircut, in favor of a broader category, "personal care." This approach will reduce the number of specific judgments required, but it will also inevitably 3 The term for expert budgets in earlier literature is "standard budget" (see, e.g., de Neufville, 1975; Orshansky, 1959)
|
From page 108... ...
Poverty Thresholds The original U.S. poverty thresholds were those developed by Mollie Orshansky in the 1960s on the basis of the Economy Food Plan, the least expensive of four food plans designed by the U.S.
|
From page 109... ...
argued that poor families spend a higher proportion of their income on food than do average families. Again, our point is not that the judgments that underlay the original poverty thresholds were necessarily more or less preferable than other judgments that could have been made, but rather, that Orshansky's approach
|
From page 110... ...
Also, unlike a number of other contemporary attempts at developing a poverty measure, she provided a matrix of thresholds that reflected different family circumstances, instead of one threshold for all families and another for unrelated individuals. Thus, the more lasting influence of her work on the official thresholds has been her implicit equivalence scale rather than her basic concept of a minimum food budget times a multiplier.
|
From page 111... ...
We estimated the effects on the reference family poverty threshold of implementing the Orshansky approach for selected years from 1950 to 1992, expressing the results in constant 1992 dollars; see Table 2-1.7 We first determined the share spent on food (consumed at home and away from home) in each year by four-person families as a percentage of their total after-tax expenditures and the corresponding multiplier (the inverse of the share)
|
From page 112... ...
, calculating the ratio of the multiplier in each year to that in 1960, and applying the ratio for each year to the official 1992 poverty threshold. The procedure assumes that the cost of the food component of the threshold remained constant in real terms and that Orshansky would have used the same food share and multiplier for a base year of 1960 as she did for her base year of 1963.
|
From page 113... ...
Second, if the method of setting the threshold had been applied annually or periodically, the threshold would have risen dramatically as real income rose over the past 40 years. That is, the application of the same method for 1950 and for 1991 would have yielded a reference family poverty threshold of $11,681 for 1950 and $20,659 for 1991.
|
From page 114... ...
To calculate poverty thresholds, Ruggles divided the annualized value of the fair market rent for the nation as a whole by the applicable percentage of income: 25 percent, corresponding to a multiplier of 4.00, or 30 percent, corresponding to a multiplier of 3.33; see Table 2-2. Thresholds developed in this manner are not available prior to the initiation of the Section 8 program; for the period 1977-1992, such thresholds have exceeded the official threshold by 45-55 percent.
|
From page 115... ...
by calculating the value for the 25th or 35th percentile of the distribution of all nonsubsidized rental units by region and type of place (central city, suburb, nonmetropolitan) from the American Housing Survey, adding the value of the Thrifty Food Plan for a three-person family, and applying a multiplier of 2.0.
|
From page 116... ...
In addition, the data sources were somewhat different. 12 Indeed, Orshansky herself developed two sets of poverty thresholds, one based on the Economy Food Plan and the other on the Low-Cost Food Plan.
|
From page 117... ...
They based their allowance for health insurance on the average total premium cost of group health insurance covering lower income families as reported in the National Health Care Expenditure Survey, and their allowance for out-ofpocket medical care expenditures was based on typical expenditures of moderate-income families with health insurance from the same source.~4 They developed a child care budget (for the case of no parent at home) by using the IRS dependent care tax credit limits on eligible expenses in full or in part, depending on the assumed age of the children and an assumption about use of free or subsidized care.
|
From page 118... ...
. Implementing these calculations for 1992 produces a two-adult/two-child poverty threshold of $14,580, or 102 percent of the official threshold.
|
From page 119... ...
Detailed Budget Approaches Extensive work on detailed budgets has been done abroad; one example is the work of the York Family Budget Unit in the United Kingdom. The United States also has experience with detailed budgets, most recently through the BLS Family Budgets Program.
|
From page 120... ...
and expenditure patterns. BLS Family Budgets Program The modern BLS Family Budgets Program had its origins in a 1945 directive from the Committee on Appropriations of the U.S.
|
From page 121... ...
Generally, each time that the moderate or intermediate budget was revised, the budget level equated closely to median family income. To develop the lower budget, BLS adapted the intermediate budget in several ways.
|
From page 122... ...
, or 138 percent of the official poverty threshold for a two-adult/two-child family. Excluding gifts, contributions, insurance, and work expenses, the lower budget was $18,629, or 131 percent of the official poverty threshold.
|
From page 123... ...
to express poverty thresholds developed under venous methods for earlier years in constant 1992 dollars, because the ong~nal official poverty thresholds have historically been updated by the CPI-U, and we wanted to maintain the real dollar relationship between the 1963 two-adult/two-child family threshold of about $3,100 and the 1992 threshold of $14,228. But our purpose is purely illustrative.
|
From page 124... ...
RELATIVE THRESHOLDS Relative poverty thresholds thresholds that are derived from the outset in a relative fashion- are based on comparing the income or consumption of a family to that of other typical families. The relative approach, as commonly implemented, designates a point in the distribution of income or expenditures to serve as the poverty line for a reference family.
|
From page 125... ...
Those whose resources are significantly below the resources of other members of society, even if they are able to eat and physically survive, are not able to participate adequately in their relationships, and therefore are not able to participate fully in society.2i A relative approach to deriving poverty thresholds recognizes the social nature of economic deprivation and provides a way to keep the poverty line up to date with overall economic changes in a society. There are several advantages to relative thresholds.
|
From page 126... ...
Often, individual countries use their benefit standards for public assistance programs as unofficial poverty lines. For comparative work across countries, however, poverty thresholds are often defined in relative terms.
|
From page 127... ...
This procedure can be adapted to set a reference threshold for any size family. Thus, for a four-person reference family, income amounts for other families would be converted to four-person equivalent amounts (e.g., the income for a single person would be multiplied by two or three, depending on the ratio of the equivalence scale value for a four-person family to that for a single person)
|
From page 128... ...
, median consumption or expenditures, or median family income. Statistics Canada chose to tie the Canadian measure to median family income adjusted for family size by means of an equivalence scale, setting one-half the median as the low-income line.
|
From page 129... ...
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)
|
From page 130... ...
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.
|
From page 131... ...
Despite these problems, the two series provide some insights on the behavior of relative poverty thresholds over time. Table 2-3 shows that onehalf median before-tax four-person family income increased over the period 1947-1992 in real terms from about $10,400 to about $22,300 an increase of 115 percent.
|
From page 132... ...
132 MEASURING POSTERITY TABLE 2-3 Relative Poverty Thresholds for a Four-Person Family Derived as One-Half of Median Before-Tax and After-Tax Four-Person Family Income, 1947-1992, in Constant 1992 Dollars One-Half Median Four-Person Family Income Dollar Amount Percent of Official Threshold Year Before Taxes After TaxesBefore TaxesAfter Taxes 1947 10,356 9,69572.868.1 1948 10,095 9,65571.067.9 1949a 9,957 9,55670.067.2 1950 10,697 10,10675.271.0 1951 11,122 10,25378.272.1 1952 11,576 10,53081.474.0 1953b 11,631 10,56781.774.3 1954a,b 12,431 11,25887.479.1 1955 N.A.
|
From page 133... ...
In contrast, the before-tax and after-tax thresholds increased in real terms, sometimes to a considerable degree, in periods of economic growth. 30 If the CPI-U-X1 is used to update the 1963 official threshold, then in 1992 the relative thresholds would exceed the official threshold by larger margins (the before-tax threshold would be about 171% and the after-tax threshold about 138% of the official threshold in 1992)
|
From page 134... ...
estimated that the use of a subjective poverty threshold, which behaved in much the same manner over the post-World War II period as a relative threshold, would have produced a similar time trend of poverty rates as the official threshold. With the subjective threshold, poverty rates declined through the mid-1970s and then rose somewhat; poverty rates with the official threshold showed a similar but more pronounced decline followed by a similar but less pronounced increase.
|
From page 135... ...
Because of these characteristics of survey responses, it may be difficult to set an actual threshold using them with any confidence. A quite different problem might arise if survey responses are known to be used to set official poverty thresholds: respondents might give different answers because of knowledge that the poverty line affects eligibility levels in a number of government assistance programs.
|
From page 136... ...
Although the variations in question wording were minor, the resulting estimated thresholds differ substantially.34 De Vos and Garner (1991) estimated a poverty threshold (1982 CEX data)
|
From page 137... ...
. In this regard, the fact that the get-along amount and the official poverty threshold were about the same in the late 1940s suggests that the poverty line, which was viewed as about "right" when it was adopted in the 1960s, would have been viewed as too high earlier in the post-World War II period.
|
From page 138... ...
138 MEASURING POVERTY TABLE 2-4 Subjective Poverty Thresholds for a Four-Person Family Derived from Survey Data, 1947-1993, in Constant 1992 Dollars Average of Responses to Survey Questions Dollar Amount, Four-Person Family Percent of Official Threshold " Get-Along" "Poverty" " Get-Along""Poverty" Year Level Level LevelLevel 1947 14,785 10,620 103.974.6 1948 15,718 11,288 110.579.3 1949a 15,244 10,947 107.176.9 1950 14,525 10,432 102.173.3 1951 15,433 11,084 108.577.9 1952 17,069 12,256 120.086.1 1953 16,342 11,734 114.982.5 1954a 17,316 12,434 121.787.4 1955 N.A.
|
From page 139... ...
; all percentages were calculated relative to the constant 1992 dollar value of $14,228 for the official two-adult/two-child poverty threshold (Bureau of the Census, 1993c:Table A)
|
From page 140... ...
For example, one can see dips in the Gallup get-along and poverty levels in real terms in periods of recession from the data in Table 2-4. One major question for poverty analysts is the time-series elasticity of subjective poverty thresholds with respect to changes in median income or consumption.
|
From page 141... ...
Consequently, poverty thresholds constructed at different times tend to reflect real changes in consumption. This is true, by definition, of relative thresholds.
|
From page 142... ...
18,018 (1992) four-person family income Expert Committee on Family 15,584 (1979)
|
From page 143... ...
. This feature produces poverty thresholds that have a normative cast, which we believe is likely to be more attractive to policy makers and the public than are thresholds developed by a purely relative approach (e.g., onehalfmedian after-tax adjusted family income)
|
From page 144... ...
Almost universally, it is agreed that poverty thresholds should be specified in after-tax terms, recognizing that families differ in tax burdens and hence in their disposable income (although the current U.S. poverty measure does not correspondingly define family income consumption expenditures minus expenditures for medical care, with all amounts in constant 1987 dollars (see Council of Economic Advisers, 1992:Table B-12)
|
From page 145... ...
By assuming, as has occurred historically, that total spending increased by more than 1 percent between year T and T + 1, then the reference family poverty threshold would have been updated in real terms in a quasi-relative rather than in a completely relative manner. The recommended procedure is somewhat more complicated than the 40 The appropriateness of using after-tax income data was recognized when the official thresholds were originally developed, but such data were not available at the time.
|
From page 146... ...
Our conclusion is informed by analysis of consumer expenditure data, consideration of the values of other thresholds developed in recent years on the basis of alternative concepts, and our judgment. Analysis of 1989- 1991 CEX Data We analyzed data from the interview survey component of the 1989-1991 CEX to help us form a judgment about a reasonable level for the initial reference family threshold under the proposed concept.
|
From page 147... ...
In examining spending patterns on food, clothing, and shelter, we found it convenient to look at the distribution in terms of the dollar values that demarcated every 5th percentile of the distribution. However, for purposes of calculating the reference family poverty threshold, whatever percentile value is chosen must be reexpressed as a percentage of median expenditures on food, clothing, and shelter for the same reason that relative thresholds are expressed as a percentage of median income or expenditures rather than as a percentile value.
|
From page 148... ...
The budget-building approach, however, encounters the problem of zero expenditures on more detailed items, especially using quarterly observations, so we recommend using the sum of these items, which is more robust. We also concluded that it is preferable to use the array for a single reference family type-two-adult/two-child families-even though this procedure considerably reduces the sample size in comparison with the procedure of converting each consumer unit's expenditures to an amount equivalent to a two-adult/two-child family.
|
From page 149... ...
In 1992 dollars, the median value is $15,344.44 The designation of a percentile value for food, clothing, and shelterwhich, when expressed as a constant percentage of the median, will drive the poverty thresholds in future years is obviously a matter of judgment. We do not recommend a specific value or even a range; we do, however, conclude that a reasonable range for the food, clothing, and shelter component of the reference family threshold would be from the 30th to the 35th percentile, or from 78 to 83 percent of the median.
|
From page 150... ...
plus personal care and one-half of total transportation costs. Redefinition 2 defines the larger bundle as the basic bundle plus personal care, education, reading matenals, and one-half of total transportation costs.
|
From page 151... ...
The sum of the larger food and clothing allowances in Renwick and the larger housing allowance in Schwarz and Volgy is $12,948, which is higher than the value of $12,719 for the 35th percentile of food, clothing, and shelter expenditures from the CEX. The Multiplier We then considered the multiplier to be applied to the food, clothing, and shelter component of the poverty threshold so as to allow a small fraction for other needed expenditures.
|
From page 152... ...
;47 and · 1.30, covering personal care, household supplies, non-work-related transportation, and such incidentals as newspapers, stamps, stationery (Schwarz and Volgy, 1992~. The Basic Bundle and Multiplier Together On the basis of our review of CEX data, we concluded that a reasonable range for the initial poverty threshold for a two-adult/two-child family is $13,700 to $15,900 (in 1992 dollars)
|
From page 153... ...
Conversely, families may spend more on food, clothing, and shelter than implied in the poverty threshold and yet still be poor if their net income falls below the poverty line. The proposed threshold concept is not intended to mandate a spending pattern for low-income people but to lead to an initial threshold that is reasonable for purposes of deriving poverty statistics.
|
From page 154... ...
Analysis Over Time The most important aspect of the proposed threshold concept is not so much the threshold that it produces for a designated start-up year, but how it moves that initial threshold over time. Our intent was to recommend a concept and procedure that would update the initial reference family poverty threshold for changes in real consumption but in a conservative manner.
|
From page 155... ...
to update the initial reference family poverty threshold. The PCE estimates are not suitable for this purpose, however, for two major reasons: they include expenditures by nonprofit institutions as well as households, and while they can be adjusted for population growth, they cannot be adjusted for changes in family size over time.
|
From page 156... ...
The thresholds produced under the proposed procedure, when using a single year's worth of data, move somewhat erratically, with a small overall increase of 7 percent in real terms between 1980 and 1991; see Table 2-7.5i By comparison, Vaughan's subjective poverty thresholds increased by 8-11 percent over the same period (1980-1993 or 1980-1989; see Table 2-4) , and relative thresholds expressed as one-half median after-tax four-person family income increased by 8-14 percent over the same period (1980-1993 or 1980-1989; see Table 2-3~.
|
From page 157... ...
This concern applies to the proposed concept, which relies on 3 years' worth of CEX data to update each year's reference family poverty threshold. (It also applies to relative concepts that peg the thresholds at, say, one-half median adjusted family income or expenditures, and to subjective concepts that make use of
|
From page 158... ...
However, another unofficial set of thresholds that are updated simply for price changes will ensure that important information is available with which to assess the behavior of the official thresholds at the next regularly scheduled review of the poverty measure. 52 Although not as obvious, the same concern applies to the current concept, which maintains the thresholds unchanged in real terms through an inflation adjustment that is based on a continuing survey of consumer prices.
|
Key Terms
This material may be derived from roughly machine-read images, and so is provided only to facilitate research.
More
information on Chapter Skim is available.