Measurement and Analysis of Poverty Research Paper

1. The Measurement Of Poverty

The most prominent early effort to measure poverty was undertaken by B. S. Rowntree in 1902, in his attempt to assess the extent of poverty in York, England (Rowntree 1902). Since that time, there have been numerous attempts to measure poverty in a variety of countries or more narrowly defined areas.

Although reducing poverty is a nearly universal goal among both nations and scholars, there is no commonly accepted way of identifying who is poor. Some argue for a multidimensional poverty concept, such as being ‘housing poor’ or ‘health poor’ or lacking in social contacts, thought of as social deprivation. Economists tend to prefer a concept of hardship that reflects economic position or economic well-being, somehow measured; that concept has come to dominate the measurement of poverty.

The measurement of economic poverty seeks to identify those families whose economic position, defined in terms of command over resources, falls below some minimally acceptable level. In addition to requiring a definition of economic well-being, the measure must specify a minimum le el of well-being (or ‘needs’) in terms that are commensurate with ‘resources.’ Sen (1983) considered the needs standard (or poverty line) to have ‘some absolute justification of its own,’ a level below which ‘one cannot participate adequately in communal activities, or be free of public shame from failure to satisfy conventions’ (p. 167). An ideal poverty measure would allow for differentiation according to household size and composition and would enable people to compare the level of access with resources over time.

Having determined the measure of household resources, the needs standard—or poverty line— appropriate for various households allows one to compare the level of household resources with its needs, and thereby to indicate if the family is poor or not poor. When this process is followed for all households in a nation (or some other jurisdiction), one obtains the Poverty rate, or the percentage of the people (or households) in the jurisdiction who are living in poverty.

Within this economic perspective, a number of economic well-being indicators have some claim to identifying the economic position of households. For example, the official US poverty measure relies on the annual cash income of a family, and compares this with some minimum income standard or ‘poverty line.’ Alternative—and equally legitimate—measures suggest that the level of annual consumption better reflects a family’s level of living, or that some measure of a family’s capability to be self-reliant or a family’s own assessment of economic well-being are superior concepts for measuring the level and composition of poverty. No matter which perspective is adopted, a large number of judgments and choices are necessary for developing a concrete poverty measure. For example, if income is taken to be the best indicator of economic status, is annual, multiyear, or lifetime income the appropriate measure? Should we examine pretax, pretransfer income or income after accounting for taxes and/or transfers? Should in-kind income be counted or not? Each decision implies both a different poverty rate and poverty population and a different set of antipoverty policies. Finally, irrespective of the decisions made, the resulting poverty measure can be either absolute or relative. The indicator is absolute if the definition of needs is fixed, so that the poverty line does not vary with the standard of living. A relative poverty measure reflects changes in the overall standard of living of the society.

1.1 Absolute Income Poverty Measures

The most prominent absolute income poverty measure is that of the USA, which is the only industrialized country to have an official poverty measure. See Ruggles (1990) and Citro and Michael (1995) for further discussion of the US definition and other definitions. Since the late 1960s, the nation has reported on the level of national poverty and the composition of the poor population. This indicator seeks to identify those families that lack sufficient annual cash income to meet what is judged to be their annual needs. The needs indicator is a fixed income threshold, constructed originally as a multiple of the food needs of households of different sizes and compositions. This threshold changes only as the price level changes, but not as average incomes in society change.

This and other income poverty indicators have a particular philosophical basis. The implied social objective is that, together, the community’s efforts and those of the individual should ensure that some minimal level of living is attained. Although people may experience hardship in many dimensions— education, housing, food, social contacts, security, environmental amenities—only a sufficiently low level of money income matters in determining who is poor. Such a measure also presumes that money income is a good proxy for welfare (or utility), and that a particular year’s income is an acceptable indicator of longer-run income.

Aside from taking exception to the social objective that underlies the official measure, most other criticisms of it focus on the adequacy of the annual cash income measure of ‘command over resources.’ While the current cash income numerator of the poverty ratio may reflect the extent to which the family has cash income available to meet its immediate needs, it indicates little about the level of consumption spending potentially available to the family. For many families, annual income fluctuates substantially over time owing to unemployment, decisions to change jobs, or changes in health. Even as an indicator of a family’s ability to meet its immediate needs, the current income measure is flawed—it reflects neither the recipient value of in-kind transfers (e.g., food or medical care subsidies) which support the economic well-being of low-income families, nor the taxes for which the family is liable. Similarly, while current cash income—and hence the official poverty measure— reflects financial flows in the form of interest and dividends from the assets held by individuals, the assets themselves are not counted, nor is the value of leisure (or voluntary nonwork) time reflected in the measure. The arbitrary nature of the denominator of the poverty ratio—the minimum-income-needs indicator—has also been criticized. Given the weak conceptual basis and the crude empirical evidence on which the dollar cut-offs rest, including the equivalence scales designed to account for the income needs of different family sizes and structures, the official US poverty lines are viewed generally as arbitrary.

These weaknesses have stimulated efforts in the US to improve the official poverty measure. In 1995, a panel appointed by the National Research Council issued its report suggesting revisions in the official measure. The poverty thresholds were modified so as to reflect a broader commodity bundle of needs (relative to the food need basis of the current thresholds) and a new set of equivalence scales. Moreover, the measure of resources was revised to include the value of in-kind transfers received by a household and to exclude estimates of the labor and income taxes for which the household is liable. While alternative versions of this new measure are being published, the new measure has not yet been adopted formally.

1.2 Relative Income Poverty Measures

Use of a relative income poverty measure takes into consideration changes in the overall economy (in terms of wages and prices); it stresses the relationship of the resources of a living unit to those available to other living units in the society.

One prominent relative poverty definition, used extensively by the European Community, considers those with incomes less than one-half of the median income to be in poverty, hence reflecting the view that poverty is only meaningful when compared with overall income or spending levels. Often, a one-half of median income standard is used in the analysis of poverty in the European Community, but more recently, a 60 percent of the median standard has been adopted (see Bradshaw 2001).

In addition to the arbitrariness of the 50—or 60—percent threshold, this measure has other weak- nesses. Critics point out the weakness of a relative measure in assessing the efficacy of antipoverty efforts. Moreover, the relative income standard ensures that the poverty threshold will rise most rapidly in periods of economic growth, during which time those at the bottom of the distribution also experience real growth in both earnings and consumption. Hence, even though poor families may perceive themselves as better off during a prosperous period, the poverty rate may not fall, thus overstating the poverty problem. As Ruggles (1990) has stated: ‘poverty cannot decline under a relative poverty measure without some change in the shape of the income distribution as a whole.’

1.3 Consumption-Based Poverty Measures

A primary criticism of income poverty measures is that the annual income concept on which they rest is a poor indicator of the permanent income (or lifetime resources) of the family unit. Using such a measure, a wealthy family with a well-educated head and substantial assets, but a year of low income, would be classified as ‘poor.’

One proposal designed to avoid this problem involves use of measured family consumption to determine poverty status, based on the argument that family consumption is a superior proxy for the family’s permanent income, or family command over resources. Slesnick (1993) argues that income measures of poverty are ‘severely biased’ (p. 2) in that temporarily low-income families are regarded as permanently needy. The consumption-based poverty indicator proposed by Slesnick uses household real consumption expenditure per equivalent adult (taken to be the quotient of real household consumption and a household-specific cost-of-living index and an equivalence scale) as the indicator of resources.

Slesnick’s consumption poverty measure has been criticized on several grounds. One particularly salient criticism concerns the arbitrary and potentially misleading equivalence scales developed by Jorgenson and Slesnick (1987) that are employed. (see Triest 1998). While other consumption-based indicators (see Cutler and Katz 1991) have shown a growing poverty rate over the last two decades, the Slesnick measure suggests that poverty in the USA has been decreasing secularly over that period.

In general, the largest impediment to utilizing a consumption-based index is the difficulty of obtaining complete and accurate family expenditure data, at least relative to measuring a family’s income. Furthermore, consumption may not fully reflect a family’s true well-being; it is possible that simple frugality may be mistaken for poverty.

1.4 Subjective Measures Of Poverty

An alternative view of poverty is the ‘Leyden School’ approach, which relies on the subjective responses of individuals to questions that seek their impressions of their own economic position or well-being, relative to some norm. (see Hagenaars 1986, van Praag et al. 1982). As with income and consumption poverty measures, subjective poverty indicators are based on an ‘access to resources’ concept, but because subjective thresholds change over time, these measures are relative poverty indicators.

Subjective poverty measures are based on survey responses to questions regarding the minimum level of income or consumption that respondents consider to be ‘just sufficient’ to allow them to live a minimally adequate lifestyle. If families respond that their own level of living exceeds that minimum, it is possible by observing their actual income to infer both a poverty line and a poverty rate. Because subjective measures are based on individual opinions of what constitutes ‘minimally adequate’ or ‘enough to get by,’ they require that individual perceptions of these notions reflect the same level of real welfare for all respondents.

A number of subjective measures have been developed and tested, mainly in Europe. Despite rather minor differences in terminology and question phrasing among these measures, they have yielded highly diverse results. The effectiveness of subjective measures is also limited by the nature of the data collection method. Most estimates are based on small sample sizes, yielding large standard errors.

1.5 Inability To Be Self-Reliant As A Poverty Measure

One additional poverty indicator should be mentioned—one that views those who are without the capability to be self-reliant as the ones with the lowest economic position. This view rests on two considerations, one conceptual and the other practical. The conceptual reason is the more basic. This position has its foundations in the writings of Sen (1992, 1997), who argued ‘that the basic failure that poverty implies is one of having minimally adequate capabilities,’ (1992, p. 111) and hence that ‘poverty is better seen in terms of capability failure than in terms of the failure to meet the ‘‘basic needs’’ of specified commodities’ (1992, p. 109).

There is also a policy-related reason for developing a capability measure of poverty. In recent years there has been renewed civic debate regarding appropriate norms and standards for individual responsibility and behavior, and hence the appropriate role of the state. A prominent viewpoint in this debate has emphasized the merits of individual independence (relative to reliance on government programs), the negative effects of government programs on individual behavior, and the desirability of a smaller economic and social policy role for government. If society is to base policy on the central social goal of ‘economic independence,’ then it would seem important to identify the size, composition, and growth of the population of citizens who do not have the capability to be independent in a market economy.

An example of such a capability-based poverty measure is based on the concept of a family’s net earnings capacity (the amount that the adults in a family could earn if they worked full time, full year, adjusted for the constraints on working at capacity due to health problems or disability and the expenses required if all of a family’s working-age adults did work at capacity). If earnings capacity is less than a poverty threshold, the family is defined as ‘unable to be self-reliant,’ and in poverty (see Haveman and Bershadker 2001). A related measure of family capability is Becker’s (1965) concept of ‘full income,’ which includes both income realized through market work and the value of leisure time.

Measuring ‘self-reliant poverty’ requires several implicit conventions, norms, and assumptions. For example, such a measure is reliable only if the ‘norm’ of full-time, full-year work is an accepted, socially determined norm representing the full use of human capital. Of necessity, attribution of poverty status to any particular family requires prediction from statistical estimates rather than values measured in survey data (such as income), and hence may be viewed as less objective than, say, income-based measures.

2. The Analysis Of Poverty

Since the mid-1960s and the US declaration of a War on Poverty, social science researchers have addressed a number of issues concerning the nature, causes, and cures of poverty. In the process, substantive additions to economic knowledge and to research methods have been developed.

2.1 Understanding The Determinants Of Poverty: Demographics, Discrimination, Human Capital, Immigration, And Macroeconomic Performance

A major objective among social science researchers has been to understand the processes which combine to result in some people failing to attain minimal standards of economic well-being. Although the number of such processes and institutions is very large, and the interactions among them complex, research has been concentrated in several areas.

The underlying demographic structure of the population—age, gender, family arrangements, fertility choices—plays a major role in determining whether families or individuals are poor. For example, the share of the population that is elderly, and hence unable to be self-reliant through work and earnings, influences the prevalence of poverty in a society. Research has tracked the poverty status of the older population and evaluated the ability of older people to escape poverty given their own resources and social support. Similarly, changes in the prevalence of singleparent families caused by rising divorce and nonmarital childbearing rates are also fundamental determinants of poverty. Families with children but only a single adult tend to be restricted in their ability to be self-reliant from own earnings. Social scientists have studied the trends and determinants of these choices in an effort to better understand the causes of poverty.

If the attitudes of the majority of the population toward minority groups are such as to lead to lower payments for equivalent work or to inferior schooling, housing, or mobility opportunities, poverty rates among minority groups would tend to be high. Given the prevalence of racial minorities among the poor population, the possible causal role of labor market, education, and housing discrimination has been an important topic of study, especially by economists. While the existence and extent of racial income gaps had been studied prior to the 1960s, later research delved deeper than previous work in measuring and explaining the sources of these income gaps. See Cain (1986) for a review of this line of analysis. Given that competition would be likely to erode the effects of discriminatory behavior by employers (Becker 1957), research turned to explanations involving ‘statistical discrimination’ and ‘market signaling’ as the basis for continued discrimination as a cause of poverty.

The role of education and training—human capital—in enabling people to attain self-sufficiency also became a focus of poverty research and analysis. The question of the effect of increases in schooling on individual earnings occupied the efforts of numerous researchers, and education came to be analyzed as a process that created human capital. Estimates of the rates of return on schooling seemed to justify diverting resources from private sector investments in physical capital to public investments in education. Rosen (1987) surveys the literature in this area. While economists focused on the earnings returns from schooling, other social scientists sought to document the effect of schooling on student attainment (such as test scores), social mobility, and economic status. This research documented the complexity of the processes by which some children succeed while others fail, and led to a search for improved data and statistical methods capable of disentangling the effects of education on attainments. This ‘human capital’ approach to schooling carried over to numerous studies of the effectiveness of governmental programs designed to provide skills and training to adult workers. See Heckman and Lochner (2000) for a review and interpretation of the evidence on the economic effects of education and training.

Concern with the problem of poverty in the USA coincided with a rapid increase in immigration, often of individuals with low levels of schooling or language competence. The potential impact of immigration in eroding wage rates for unskilled workers in urban labor markets containing large numbers of immigrants became an important policy and research issue.

The effect of the overall performance of the economy on the poverty rate was also the subject of substantial research and analysis, beginning in the 1960s. During the 1970s, economic growth and low unemployment seemed to be powerful instruments in reducing unemployment. However, during the 1980s and early 1990s, economic growth seemed to have lost its antipoverty effectiveness. Evidence suggests that during the 1990s, the level of poverty was again responding to macroeconomic performance. See Haveman and Schwabish (2000) for a review of this research and for recent evidence.

2.2 Understanding Social Mobility, Status Attainment, And Income Dynamics

Research on the causes of poverty have tended to focus on static issues—factors that appear to be causally related to low economic position. Simultaneously, a complementary line of research addressed questions of the dynamic processes by which people either succeed or fail to attain economic position—processes that indicate the openness or fairness of society. While research on these social mobility processes had been undertaken prior to the 1960s, those studies were limited by the absence of both a conceptual framework and data on individuals over time—longitudinal data—necessary to trace these dynamic patterns. The early 1960s witnessed a number of important research contributions designed to increase understanding of the process of social mobility. One of the most central of these presented a causal model of the socioeconomic life cycle, distinguishing the interactions among three primary life phases: family, schooling, and work (see Duncan and Hodge 1963). The socioeconomic status of the job was taken to be the ultimate indicator of success, with family back-ground and schooling (as an intervening variable) viewed as the determinants of that status. This framework stimulated several empirical studies of these relationships, yielding insights into changing intergenerational correlations involving occupations and income, changes in the degree of social mobility, changes in the role of education in fostering mobility, and changes in mobility patterns between whites and nonwhites. A variant of this approach sought to identify the factors that contribute to social or economic status, distinguishing those that relate to exogenous family and background factors from those amenable to policy influence. Two prominent examples of this approach are Jencks et al. (1972, 1979). Family characteristics and choices and intellectual inheritance were seen as playing important roles, but school quality and the racial mix of neighbors and peers were found to be less important. Haveman (1987) reviews and critiques this research.

While these analyses were revealing, they demonstrated the difficulty of making progress in this area without detailed data on individuals and families that tracked their attributes and performance over time. The Panel Study of Income Dynamics, the National Longitudinal Surveys, and the Survey of Income and Program Participation are among the most prominent and high quality of these data collection efforts. Extensive use of them has enabled major advances in understanding the nature and causes of poverty, including the lengths (or persistence) of poverty and welfare stays among the poor, trends in income trajectories among families with various characteristics, the identification of the long-term or permanently poor population, and estimates of the relative roles of family background, schooling choices, neighborhood characteristics, and labor market discrimination in determining the probability of being poor. A complementary field of study has used these data to explore the determinants of these family characteristics (e.g., poverty-level incomes, single-parent status, low parental education, welfare recipiency), schooling quality, neighborhood characteristics, and own schooling and fertility choices on a variety of children’s attainments (see Haveman and Wolfe 1995, Duncan and Brooks-Gunn 1997).

2.3 Antipoverty Effects Of Policy Interventions

Poverty researchers have also sought to describe the various policy measures in place to assist poor families and to identify changes in or alternatives to these policies that might be effective in reducing poverty. Probably because the main antipoverty efforts were in the area of income support measures, analysts concentrated their assessments on such policies. A voluminous literature describing the nature of income support policies and critiquing their incentive (efficiency) and equity characteristics has influenced policy changes over the period since the 1960s. These analyses revealed low ‘take-up’ rates among people eligible for support, horizontally uneven support patterns among equally poor people, the uncertain rationale for and implications of providing support via in-kind benefits vs. tax subsidies vs. cash transfers, the relative effectiveness of alternative programs in reducing poverty rates or the intensity of poverty, and the presence of incentives for undesirable behaviors (e.g., reductions in work, increases in family breakups, and nonmarital childbearing) implicit in the structure or administration of the programs.

These descriptive and policy analysis studies played an important role in guiding numerous antipoverty policy reform efforts that have occurred over the past several decades, including proposals for ‘negative income tax’ plans, work-related subsidies, the substitution of in-kind for cash benefits, and ‘welfare-to-work’ initiatives. They also provided a catalog of important questions for which answers would be relevant in designing effective policy: how large are work effort reductions in response to income transfers? Has public income support reduced family stability, increased unemployment, reduced savings, or increased nonmarital childbearing? (see Haveman 1987).

2.4 Labor Supply, Family, And Fertility Effects Of Income Support Policy

Concerns with the work incentive effects of income support policy have dominated debates over this antipoverty strategy. Numerous analysts responded to this concern with empirical studies documenting the extent of these behavioral responses to public income support programs. These studies, employing a variety of survey data and empirical methods, found that public benefits tend to reduce employment probabilities, lower work hours per year if working, and possibly reduce wage rates among both recipients and potential recipients of benefits.

Most of the early studies employed cross-sectional survey data in order to measure the responses of individuals to the increased income from transfer benefits and the reduced effective wage rate associated with working. Later studies relied on the results from carefully designed ‘social experimental’ studies of these potential responses (see below). The essential characteristic of these studies is the random assignment of families to alternative forms of transfer program designs (in terms of the generosity of income guarantees and the extent of ‘benefit reduction’ rates), and the observation of the behavior and performance of these families over subsequent years. Both forms of studies confirmed that, as expected, work effort falls as nonlabor income rises and as the effective wage rate falls. While the estimates varied widely, nearly all of them raised serious questions about the efficiency and effectiveness of this income support approach to helping poor people.

While these studies focused on the work effort responses of people to the availability of income support, other analyses (including randomized approaches) tested the family structure, childbearing, health care utilization, housing quality, and welfare utilization choices of low-income families in response to both welfare-type policies and reform efforts in the educational, housing, health insurance, and public employment areas. Danziger et al. (1981) and Moffitt (1992) have surveyed this research.

3. Poverty Research And Social Science Methods

In addition to adding to the body of knowledge regarding the nature, causes, and cures of poverty, the growth of poverty-related research since the 1960s has also contributed to the development of new research methods of general applicability in the social sciences (Haveman 1987). Four contributions deserve mention.

The first contribution consists of a new field of evaluation analysis and research. As analysts, in response to the demands of policy makers, focused on the poverty problem, an emerging analytical area, evaluation research, was also being spawned. Interest in this applied research approach extended far beyond the poverty issue, but research on social and antipoverty policy issues provided this then-nascent subdiscipline with some of its basic methods and case studies. Without the emphasis of policy makers on the need to evaluate the effectiveness of the numerous new antipoverty initiatives, it is unlikely that this field of analysis, with its journals and professional organizations, would have developed as rapidly as it has, and in the same directions.

Second, as noted above, randomized social experimental research was first applied to proposed policy interventions in the poverty area—the negative income tax proposals, school and housing vouchers, employment and training measures, and so on. Without the emphasis on the effect of antipoverty policy interventions on family economic status during the 1960s and 1970s, it is unlikely that this important social science research method would have attained the status it now holds among social science researchers.

One of the problems that analysts face in assessing the effects of policy and other changes on the behavior of people is the need to rely on samples of observations that may be composed of individuals who are selectively included in the sample, and hence unrepresentative of the larger population for which inferences are desired. This concern dominated the study of labor markets well before demands to assess the impacts of antipoverty measures, especially in the employment and training area, where factors that determined the presence of a person in a research sample were also determinants of the effect that was being studied (see Ashenfelter 1978). Several approaches to this problem were developed by econometricians (see especially Heckman 1979), and these statistical tools became a standard part of applied statistical analyses.

Finally, in part because of the development of large representative samples of national populations, analysts began developing computer models designed to simulate the effects on the income, well-being, and behavior of each observation in a data set of actual or proposed policy measures. The application of such micro-data simulation models found its most welcomed audience among analysts concerned with the effects of changes in taxation and income transfer policy on low- income families. Without the impetus provided by the need to assess the impacts on poor people of proposed policies, this advance to predictive model building would not have occurred. This research methodology is assessed in Citro and Hanushek (1991).

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