Income poverty measurement: Identification

Income poverty measurement: Identification

A key tool for identifying the poor is a poverty line, often also called a poverty threshold or cut-off. A monetary poverty line is the minimum amount of money considered necessary to lead a non-impoverished life. People whose income level is below the poverty line are considered poor, and people with an income at or above it are non-poor. Poverty lines are usually denoted by z.

Example: Consider four people, with incomes (7, 2, 4, 8), and a poverty line of 5. The two persons who have less than 5 (2 and

4) are poor. If a 1 means the person is poor, and a 0 means they are non-poor, after identification we have (0,1,1,0). It is that easy.

The difficult step in identification is setting the poverty line. There are three types of poverty lines:

• Absolute poverty lines: identify the minimum income level required for all individuals. Absolute income poverty lines are often constructed calculating the monetary value of the set of food items that provide the amount of calories required by an ‘equivalent adult’ (about 2100 calories

a day) and augmenting this cost by some proportion to account for non- food items also considered necessary. 15 Usually a food poverty line and total poverty line are distinguished. Absolute poverty lines have the advantage that they are comparable over time (with the appropriate price adjustments) and across countries (even when the food items differ, the set is supposed to provide a certain amount of calories). This is the approach officially adopted by the US and most Latin American countries. The World Bank uses a version of this methodology and is currently using a (lower) poverty line of US$1.25 a day and a (higher) poverty line of US$2

a day.

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• Relative poverty lines: identify the poor based on a context-dependent poverty line. Relative poverty lines are usually some fraction of an income standard, such as the mean or the median. The idea is that individuals in more affluent societies need higher income levels to lead a non-

impoverished life than individuals in less affluent contexts. 16 This

approach has been adopted by most countries of the European Union (EU). While the concept of relative poverty sounds appealing, it can have some counter-intuitive implications: if all incomes in a society suddenly dropped sharply by exactly the same extent, leaving most of the society in

a destitute situation from an absolute point of view, relative poverty would not change. • Hybrid poverty lines: combine an absolute with a relative poverty line. 17

The choice of which poverty line to use, and where to set the threshold (whether based on international convention or a national one, whether to use

a food poverty line or a basic consumption basket, etc.), is a value judgement and a political choice. It also depends on the purpose of the poverty measure. Note that although the poverty line may divide the population into two neat groups, it may exaggerate differences between individual people. There may not be a marked difference between a person whose income is just a tiny bit above the poverty line and another just below it. 18

Income poverty measurement: Aggregation The next step is to aggregate the information we have about poor persons into

a poverty measure, or poverty index. 19

Definition: a poverty measure is an index P (y;z) that gives the level of poverty of distribution y, according to the poverty line z.

The most common poverty index is the headcount ratio, which reports the percentage of the population who are poor. For example, ‘32 per cent of people in Tartal are poor’. However as Box 6.6 discusses, the headcount ratio is a flawed measure. The most common way to improve the headcount ratio draws on what are called the Foster–Greer–Thorbecke (FGT) indices. This is a family of indices, which includes the headcount ratio as one of its members, but it has the advantage that other members of this family provide better incentives for policy-makers to address the very poorest of the poor. All members of the FGT family can be decomposed by district, ethnicity, rural–urban or any other categories of the population.

Two are widely used:

1 Poverty Gap (FGT-1): reflects the depth of poverty as well as the headcount ratio

2 Squared Poverty Gap (FGT-2): reflects the headcount ratio, the depth of poverty and the inequality among the poor. This measure prioritizes the poorest of the poor.

POVERTY AND INEQUALITY MEASUREMENT