Poverty threshold

The poverty threshold, or poverty line, is the minimum level of income deemed necessary to achieve an adequate standard of living in a given country. In practice, like the definition of poverty, the official or common understanding of the poverty line is significantly higher in developed countries than in developing countries.

The common international poverty line has in the past been roughly $1 a day. In 2008, the World Bank came out with a revised figure of $1.25 at 2005 purchasing-power parity (PPP).

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 calculation was simplified to be based solely on the cost of food and is updated each year. In developing countries, the most expensive of these resources is typically the cost of housing. 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 account for various circumstances, such as whether one is a parent, elderly, a child, married, etc. The poverty threshold may be adjusted each year.

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.

Defining poverty thresholds

Poverty thresholds can be defined in different ways:

• Based on social security and welfare benefits. 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 a government may reduce or increase the guaranteed income, thus reducing or increasing the incidence of poverty according to this definition, without changing the ability of individuals to buy food or pay for housing.
• 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 basket of goods deemed necessary to live at the socially accepted minimum. Most developing countries and some developed ones (including the US) use this approach. This is commonly called a cost of basic needs poverty line, and varies according to the price of food, clothing, or other items in the "basket".
• An absolute figure based on the national poverty lines found in some group of countries which is then fixed in time and adjusted only for inflation. When the World Bank calculates its global poverty counts it uses the average poverty line found amongst the poorest countries.

Absolute poverty

A measure of absolute poverty quantifies the number of people below a fixed real poverty threshold. For the measure to be absolute, the line must be the same in different countries, cultures, and technological levels. 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 possible only 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 essentially the same amount of resources 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.

Measuring poverty by an absolute threshold has the advantage of applying the same standard across different locations and time periods, making comparisons easier. On the other hand, it suffers from the disadvantage that any absolute poverty threshold is to some extent arbitrary; the amount of wealth required for survival is not the same in all places and time periods. For example, a person living in far northern Scandinavia requires a source of heat during colder months, while a person living on a tropical island does not.

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. Absolute poverty is the absence of enough resources (such as money) to secure basic life necessities.

According to a UN declaration that resulted from the World Summit on Social Development in Copenhagen in 1995, absolute poverty is "a condition characterised by severe deprivation of basic human needs, including food, safe drinking water, sanitation facilities, health, shelter, education and information. It depends not only on income but also on access to services."

David Gordon's paper, "Indicators of Poverty & Hunger", for the United Nations, further defines absolute poverty as the absence of any two of the following eight basic needs:

• Food: Body Mass Index must be above 16.
• Safe drinking water: Water must not come from solely rivers and ponds, and must be available nearby (less than 15 minutes walk each way).
• Sanitation facilities: Toilets or latrines must be accessible in or near the home.
• Health: Treatment must be received for serious illnesses and pregnancy.
• Shelter: Homes must have fewer than four people living in each room. Floors must not be made of dirt, mud, or clay.
• Education: Everyone must attend school or otherwise learn to read.
• Information: Everyone must have access to newspapers, radios, televisions, computers, or telephones at home.
• Access to services: This item is undefined by Gordon, but normally is used to indicate the complete panoply of education, health, legal, social, and financial ( credit) services.

For example, a person who lives in a home with a mud floor is considered severely deprived of shelter. A person who never attended school and cannot read is considered severely deprived of education. A person who has no newspaper, radio, television, or telephone is considered severely deprived of information. All people who meet any two of these conditions — for example, they live in homes with mud floors and cannot read — are considered to be living in absolute poverty.

Relative poverty

A measure of relative poverty defines "poverty" as being below some relative poverty threshold. For example, the statement that "households with an accumulated income less than 50% of the median income are living in poverty" uses a relative measure to define poverty. In this system, if everyone's real income in an economy increases, but the income distribution stays the same, then the rate of relative poverty will also stay the same.

Relative poverty measurements can sometimes produce odd results, especially in small populations. For example, if the median household in a wealthy neighborhood earns US$1 million each year, then a family that earns US$100,000 would be considered poor on the relative poverty scale, even though such a family could meet all of its basic needs and much more. At the other end of the scale, if the median household in a very poor neighbourhood earned only 50% of what it needs to buy food, then a person who earned the median income would not be considered poor on a relative poverty scale, even though the person is clearly poor on an absolute poverty scale.

Measures of relative poverty are almost the same as measuring income 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 income 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: it is possible to reduce absolute poverty while increasing relative poverty.

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

Basic needs

Some measurements combine certain aspects of absolute and relative measures. For example, the Fraser Institute publishes a basic needs poverty measure for Canada. According to the Fraser Institute, "the basic-needs approach is partly absolute (the list [of necessities] is limited to items required for long-term physical well-being) and partly relative, reflecting the standards that apply in the individual's own society at the present time." The Fraser Institute's list of necessities for living creditably in Canada includes not only food, shelter, clothing, and health care, but also personal care, furniture, transportation, communication, laundry, and home insurance. It is criticized for not including any entertainment items like cable television, daily newspapers, and tickets to movies or sporting events.

National poverty lines

National estimates are based on population-weighted subgroup estimates from household surveys. Definitions of the poverty line may vary considerably among nations. For example, rich nations generally employ more generous standards of poverty than poor nations. Thus, the numbers are not comparable among countries.

In 2009, in the United States of America, the poverty threshold for a single person under 65 was US$11,161; the threshold for a family group of four, including two children, was US$21,756.

In the UK, "more than five million people – over a fifth (23 per cent) of all employees – were paid less than £6.67 an hour in April 2006. This is based on a low pay rate of 60 per cent of full-time median earnings, equivalent to a little over £12,000 a year for a 35-hour working week. In April 2006, a 35 hour week would have earned someone £9,191 a year - before tax or National Insurance"

India's official poverty level, on the other hand, is split according to rural vs. urban thresholds. For urban dwellers, the poverty line is defined as living on less than 538.60 rupees (approximately USD $12) per month, whereas for rural dwellers, it is defined as living on less than 356.35 rupees per month (approximately USD $7.50). By this measure, only 27.5% of Indians live in poverty, whereas by the World Bank standard of $1.25 per day, 42% of Indians live in poverty - this is the third highest rate in South Asia after Bangladesh and Bhutan.

Criticisms

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 problem, poverty indices 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 are used, they must be quantified, which is not a simple (if even achievable) task.

Overstating poverty

In-kind gifts, whether from public or private sources, are not counted when calculating a poverty threshold. For example, if a parent pays the rent on an apartment for an adult daughter directly to the apartment owner, instead of giving the money to the daughter to pay the rent, then that money does not count as income to the daughter. If a church or non-profit organization gives food to an elderly person, the value of the food is not counted as income to the elderly person. Rea Hederman, a senior policy analyst in the Centre for Data Analysis at the Heritage Foundation, said

The official poverty measure counts only monetary income. It considers antipoverty programs such as food stamps, housing assistance, the Earned Income Tax Credit, Medicaid and school lunches, among others, "in-kind benefits" -- and hence not income. So, despite everything these programs do to relieve poverty, they aren't counted as income when Washington measures the poverty rate.

Studies measuring the difference between income before and after taxes and government transfers, however, have found that without these programs poverty would be roughly 30% to 40% higher than the official poverty line indicates, despite many of their benefits not being counted as income.

Understating poverty

The U.S. poverty threshold in particular has been criticized for understating poverty, by using an outdated "basket of goods" to set the standard. While cost of these goods is adjusted for inflation every year, the basket of goods itself remains the same. It excludes the cost of items that were rare among poor Americans in the 1950s, but which are now common, such as a telephone, a car and a microwave oven. Mollie Orshansky, who devised the original goods basket and methodology to measure poverty, used by the U.S. government, in 1963-65, suggested an updated list in 2000. She found that the point where a person is excluded from the nation's prevailing consumption patterns, is roughly 170% of the official poverty threshold.

Furthermore, in developed countries, such as the U.S., poverty tends to be cyclical. Thus, the poverty line indicates only how many people are poor at any one point in time. It does not report the number of people who will experience poverty during their lifetimes. In the U.S. for example, roughly 12%-13% fall below the poverty line in any given year, but roughly 40% will experience poverty at some point over a ten-year timespan.