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A GENERAL OVERVIEW OF INCOME MEASURES THE PROS & PITFALLS OF POVERTY MEASURES

A GENERAL OVERVIEW OF INCOME MEASURES THE PROS & PITFALLS OF POVERTY MEASURES. Harvey Low 25 in 5 NETWORK FOR POVERTY REDUCTION January 28, 2008. CONTEXT. POVERTY : Indigence, want, scarcity, deficiency the state of being extremely poor the state of being insufficient in amount

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A GENERAL OVERVIEW OF INCOME MEASURES THE PROS & PITFALLS OF POVERTY MEASURES

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

  2. 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. Page 2

  3. 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 Page 3

  4. 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 necessitiesas similar lower income families • while higher income HH’s 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” Page 4

  5. LOW INCOME CUT-OFF (LICO) DEFINITION • LICOs identify those who are substantially worse off than theaverage • 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” Page 5

  6. 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 Page 6

  7. 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 considerlarge 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 Page 7

  8. 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” Page 8

  9. 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 Page 9

  10. 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 Page 10

  11. 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 Page 11

  12. 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) Page 12

  13. 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” Page 13

  14. 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 Page 14

  15. 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)… Page 15

  16. OTHER RELATED MEASURES Page 16

  17. SAMPLE COMPARISONS Page 17

  18. SAMPLE COMPARISONS • LICO before-tax 2000 (Pop 500,000+) • 1 person > $18,371 • 2 persons > $22,964 • 3 persons > $28,560 • 4 persons > $34,572 • LICO after-tax 2000 (Pop 500,000+) • 1 person > $15,172 • 2 persons > $18,513 • 3 persons > $23,415 • 4 persons > $29,163 • LIM (for this example, we use adults only) • 1 person > $12,468 • 2 persons > $17,455 • 3 persons > $22,422 • 4 persons > $27,430 • CCSD Low Income Guideline 2000 • 1 person > $14,530 • 2 persons > $24,119 • 3 persons > $29,060 • 4 persons > $33,912 • MBM 2000 (Toronto CMA) • Family of 4 > $27,343 Page 18

  19. 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 ofpoverty? • 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.) Page 19

  20. For more information contact: Harvey Low City of TorontoSocial Development, Finance and AdministrationSocial Policy, Analysis and Research Telephone: 416-392-8660 Email: hlow@toronto.ca

  21. 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 Page 21

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