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Poverty threshold

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The poverty threshold, or poverty line, is the level of income below which one cannot afford to purchase all the resources one requires to live. People who have an income below the poverty line have no discretionary disposable income, by definition. The official or common definition of "poverty line" in developed nations like the United States is much higher than in the Third World.

It is widely discussed how and where to set the poverty threshold. In practice, different countries often use different poverty thresholds. Globally, however, it is more common to use only one poverty threshold in order to compare economic welfare levels. When comparing poverty across countries, the purchasing power parity exchange rates are used. These are used because poverty levels otherwise would change with the normal exchange rates. Thus, 'living for under $1 a day' should be understood as having a daily total consumption of goods and services comparable to the amount of goods and services that can be bought in the U.S. for $1. Self-produced goods and public services are included in this measure.

Almost all societies have some citizens living in poverty. The poverty threshold is useful as an economic tool with which to measure such people and consider socioeconomic reforms such as welfare and unemployment insurance to reduce poverty.

Determining the poverty line is usually done by finding the total cost of all the essential resources that an average human adult consumes in one year. This approach is needs-based in that an assessment is made of the minimum expenditure needed to maintain a tolerable life. This was the original basis of the poverty line in the United States, whose poverty threshold has since been raised due to inflation. In developing countries, the most expensive of these resources is typically the rent required to live in an apartment. Economists thus pay particular attention to the real estate market and housing prices because of their strong influence on the poverty threshold.

Individual factors are often used to handle various circumstances, such as whether one is a parent, elderly, a child, married, etc.

Problems with using a poverty threshold

Using a poverty threshold is problematic because having an income marginally above it is not substantially different from having an income marginally below it: the negative effects of poverty tend to be continuous rather than discrete, and the same low income affects different people in different ways. To overcome this poverty indexes are sometimes used instead; see income inequality metrics.

A poverty threshold relies on a quantitative, or purely numbers based measure of income. If other human development-indicators like health and education shall be used, they must be quantified, not a simple (if even achievable) task.

Another problem is the definition of "required resources". For middle class Americans, this goes far beyond food and shelter:

"Poverty" here isn't like poverty in the past or in most other places in the world. For example, starvation was a constant danger for most of humanity since time immemorial, but it is almost unheard of today in America even with all its three hundred million occupants. Most people "below the poverty line" here have access to running water, modern plumbing, electricity, refrigeration of food, a bed, furniture, air-conditioning, products for personal hygiene, cleaning products, cooking and eating utensils, plenty of warm clothing, and more than sufficient food to stay healthy. In addition to these goods that satisfy the more basic needs, virtually anyone can save enough to have access to modern goods like television sets, telephones, DVD players, washing machines, personal computers, books, radios, CD players, and microwave ovens. [1]

Defining poverty thresholds

Poverty thresholds can be defined in different ways:

  • Social Security benefit based. If a government guarantees to make income up to some particular level then it may be presumed that that level is the poverty threshold. This is a problematic definition, because an uncharitable government may reduce the guaranteed income, thus reducing the incidence of poverty so defined while increasing the incidence of actual poverty.
  • A relative income line, related to some fraction of typical incomes. This excludes the wealthiest individuals from the calculation. For example, the OECD and the European Union uses 60% of national median equivalised household income.
  • A relative figure fixed in time and only adjusted for inflation - thus avoiding the possibility that if income inequality increases, then poverty may otherwise also increase.
  • When the World Bank calculates its "$1 a day" statistics, it uses a poverty threshold.

Absolute poverty

A measure of absolute poverty quantifies the number of people below a poverty threshold, and this poverty threshold is independent of time and place. For the measure to be absolute, the line must be the same in different countries. Such an absolute measure should look only at the individual's power to consume and it should be independent of any changes in income distribution. Such a measure is only possible when all consumed goods and services are counted and when PPP-exchange rates are used (see purchasing power parity). The intuition behind an absolute measure is that mere survival takes the same amount of goods across the world and that everybody should be subject to the same standards if meaningful comparisons of policies and progress are to be made. Notice that if everyone's real income in an economy increases, and the income distribution does not change, absolute poverty will decline.

Furthermore, the rate of absolute poverty can decline even though inequality is increasing - as long as the poorest get a higher real income than they had before.

This type of measure is often contrasted with measures of relative poverty (see below), which classify individuals or families as "poor" not by comparing them to a fixed cutoff point, but by comparing them to others in the population under study. (The term absolute poverty is also sometimes used as a synonym for extreme poverty.)

Relative poverty

See also: Relative deprivation

A measure of relative poverty defines "poverty" as being below some relative poverty threshold. An example is when poverty is defined as households who earn less than 25% of the median income is a measure of relative poverty. Notice that if everyone's real income in an economy increases, but the income distribution stays the same, relative poverty will also stay the same.

Measures of relative poverty are almost the same as measuring inequality: If a society gets a more equal income distribution, relative poverty will fall. Following this, some argue that the term 'Relative Poverty' is itself misleading and that 'Inequality' should be used instead. They point out that if society changed in a way that hurt high earners more than low ones, then 'relative poverty' would decrease but every citizen of the society would be worse off. Likewise in the reverse direction: over the last few centuries, many countries have lowered their absolute poverty while increasing their relative poverty.

The phrase relative poverty can also be used in a different sense to mean "moderate poverty". For example, a standard of living or level of income which is higher than what is needed to satisfy basic needs (like water, food, clothing, shelter, and basic health care), but which is still significantly lower than that of the majority of the population under consideration.

References

Ray, Debraj 1998, Development Economics, Princeton University Press, ISBN 0691017069.

See also

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