A GENERAL OVERVIEW OF INCOME MEASURES

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A GENERAL OVERVIEW OF INCOME MEASURES THE PROS
PITFALLS OF POVERTY MEASURES
Harvey Low 25 in 5 NETWORK FOR POVERTY
REDUCTION January 28, 2008
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CONTEXT

• POVERTY Indigence, want, scarcity, deficiency
• the state of being extremely poor
• the state of being insufficient in amount
• (Oxford Dictionary)
•  
•  
• IRONY
• Poverty by its own definition is the fundamental
  barrier
• in effectively measuring it.

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PRESENTATION OVERVIEW

• 1.    Low Income Cut-off (LICO)
• 2.    Low Income Measure (LIM)
• 3.    Market Basket Measure (MBM)
• 4.    Canadian Council on Social Development Low
  Income Guidelines
• 5.    Fraser Institute Basic Needs Measure
• 6.    Community Affordability Measure (CAM)
• 7.    Gini-Coefficient
• 8.    Placed-based Measures
• 9.    Conclusions Issues
•  

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LOW INCOME CUT-OFF (LICO)

• HISTORY RATIONALE
• Introduced in 1968 based on 1961 Census
• Research indicated that
• higher income HH spend proportionally less on
  basic necessities as similar lower income
  families
• while higher income HHs spend more, they also
  have more to spend on other things other than
  basic necessities
• Thus a HH that spends a greater proportion of
  income on basic necessities is worse-off than the
  average family, as they have less to spend on
  other essentials

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LOW INCOME CUT-OFF (LICO)

• DEFINITION
• LICOs identify those who are substantially worse
  off than the average
• income thresholds are determined by analysing
  expenditure data
• threshold HH spending 20 or more of their
  income on necessities than the average HH
• HH that devote a larger share of gross income to
  basic necessities than the average, would fall
  into the category of straightened circumstance
• as the name implies, it is a low income cut-off
  not a poverty line
•  

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LOW INCOME CUT-OFF (LICO)

• PROS
• well-known and a statistically valid measure
• readily available and consistently used
• adjusts for inflation
• accounts for changes in spending patterns,
  household size, and community size
• supports the view that poverty is relative
• has been proven to corresponds to public
  perceptions (1)
•  
• (1) Gallup Canada Survey.
• Resulting Gallup estimate (adjusted to reflect
  annual inflation)
• and the LICO have been reliably close CCSD

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LOW INCOME CUT-OFF (LICO)

• PITFALLS
• no official status as a poverty measure, and not
  promoted as such by STC
• difficult for the general public to understand
• a measures of relative income/expenditures only
  and not poverty
• does not account for cost of living
• includes all kinds of people some who may not
  be poor
• does not consider large city differentiations
• does not take into account complexities of
  sub-populations (single parents, disabled)
• does not measure other dimensions (e.g.,
  episodic, long-term, underemployment)
• relative measures result in relative results
• sensitive to economic cycles
• does not account for changes in standard of
  living
• the 20 rule has been argued to be arbitrary

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LOW INCOME MEASURE (LIM)

• HISTORY RATIONALE
• introduced in 1988 and presented in 1991, as a
  result of a STC review of methods for defining
  low income
•  
• DEFINITION
• those living in families that have an after-tax
  income lower than 50 of the median income for
  all families in a given year
• as the name implies, it is a low income measure
  not a poverty line

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LOW INCOME MEASURE (LIM)

• PROS
• simple to calculate and thus understand
• accounts for the number of adults and children
  present in families
• can be readily used for comparisons between
  countries
•  
• PITFALLS
• no official status as a poverty measure, and not
  promoted as such by STC
• similar to LICO in terms of its relative nature
  
• does not account for cost of living
• no detailed geographic component to LIMs as there
  are for LICOs

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MARKET BASKET MEASURE (MBM)

• HISTORY RATIONALE
• initiated in 1997 over Ministerial concerns on
  current measures, and introduced in 2003 as part
  of the desire to measure national child benefits
• result of HRDC consultations with Federal,
  Provincial, and Territorial working groups
• developed as a supplemental measure used in
  conjunction with LICOs and LIMs

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MARKET BASKET MEASURE (MBM)

• DEFINITION
• reflects changes in the cost of consumption
  rather changes in income
• specifies a basket of goods and services and the
  calculation of how much it would cost to purchase
  that basket
• the "basket" on which the MBM is based includes
  five types of expenditures
• food
• clothing and footwear
• shelter
• transportation (public transit or private
  vehicle)
• other household needs (e.g., school supplies,
  furniture, newspapers/magazines, recreation etc.)
• HH with incomes that are less than the cost of
  basic goods and services are considered to be low
  income
• costs are adjusted for provincial differences in
  cost of living, and community and HH size

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MARKET BASKET MEASURE (MBM)

• PROS
• more transparent and easier to understand than
  LICO
• sensitive to geographic cost differences
• recognizes different family sizes and
  compositions
•  
• PITFALLS
• not promoted as poverty line by STC
• debate over what should be included in the basket
  (basic needs vs. ability to participate fully)
• updates prices only, with only minor adjustments
  to basket goods (basket does not change over
  time)

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OTHER RELATED MEASURES

• CANADIAN COUNCIL ON SOCIAL DEVELOPMENT LOW INCOME
  GUIDELINES
• a relative measure that reflects a social
  inclusion approach to the definition of poverty
• guidelines based on average family income with ½
  of the average as the threshold for a family of
  three
• adjustments are made based on family size
•  
• FRASER INSTITUTE BASIC NEEDS MEASURE
• a variation of the MBM approach but based on
  minimal set of goods and services
• ISSUES debate over the content of the basket

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OTHER RELATED MEASURES

• COMMUNITY AFFORDABILITY MEASURE (CAM)
• developed by the technical team of the Federation
  of Canadian Municipalities Quality-of-Life
  Reporting System
• defined as the ratio of income levels to the
  local cost of living
• measures the change in the ratio of median and
  modest income levels to the local cost of living
  for family/individual after-tax income to the
  market basket
• it does not measure communities against an ideal
  or theoretical standard, but against the
  aggregate total of all communities in the study
• ISSUES market basket is based on actual survey
  of items for each community, which is
  comprehensive but also time-consuming and
  resource intensive

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OTHER RELATED MEASURES

• GINI COEFFICIENT
• a measure of inequality that identifies those who
  are substantially worse off than the average
• an income dispersion measure
• used as international comparator to indicate how
  the distribution of income has changed within
  countries and over time
•  
• PLACE-BASED MEASURES
• methods used to determien the concentrations and
  spatial patterns of income
• encompass methods that fall under the
  specialization of GIS (GEOGRAPHIC INFORMATION
  SYSTEMS)
•  

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OTHER RELATED MEASURES
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SAMPLE COMPARISONS
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SAMPLE COMPARISONS

• LICO before-tax 2000 (Pop 500,000)
• 1 person gt 18,371
• 2 persons gt 22,964
• 3 persons gt 28,560
• 4 persons gt 34,572
• LICO after-tax 2000 (Pop 500,000)
• 1 person gt 15,172
• 2 persons gt 18,513
• 3 persons gt 23,415
• 4 persons gt 29,163
• LIM (for this example, we use adults only)
• 1 person gt 12,468
• 2 persons gt 17,455
• 3 persons gt 22,422
• 4 persons gt 27,430
• CCSD Low Income Guideline 2000
• 1 person gt 14,530
• 2 persons gt 24,119
• 3 persons gt 29,060

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CONCLUSIONS ISSUES

• approaches to measuring poverty are as varied as
  are the social values of those interpreting them
• lesson learned one-size does not fit all
• ISSUES (must happen together)
• PROBLEM RE-DEFINITION
• Core concepts of poverty?
• What constitutes basic needs?
• Adequate income?
• Other poverty dimensions (long-term/episodic,
  sub-population characteristics etc.)?
• MEASURES REVIEW
• What are the most appropriate measures?
• How do they compare in terms of incidence rates
  and absolute numbers?
• Are any missing? (qualitative surveys,
  deprivation index etc.)

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For more information contact Harvey Low City of
TorontoSocial Development, Finance and
AdministrationSocial Policy, Analysis and
Research Telephone [phone] Email
hlow_at_toronto.ca
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Various Sources

• Canadian Council on Social Development, David
  Ross, Katherine Scott
• City of Toronto Social Development Finance
  Administration Alan Meisner, Harvey Low
• Federation of Canadian Municipalities
  Quality-of-Life Reporting System
• Philip Giles
• Human Resources Development Canada
• Andrew Mitchell
• Hindia Mohamoud
• National Council of Welfare
• Chris Sarlo
• Richard Shillington
• Various Social Planning Councils
• Statistics Canada Garnett Picot, John Myles,
  Kevin Bishop, Sylvie Michaud, Statistical Society
  of Canada Cathy Cotton
• World Bank

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