The mismatch between income measures and direct outcome measures of poverty.

• Author: Perry, Bryan

Abstract

A key finding of recent poverty research is that there is a significant mismatch between poverty measured using an income approach and poverty measured directly in terms of observed deprivation or other indicators of unacceptably low living standards. The mismatch is substantial and is typically in the range of 50% to 60%. This paper takes this mismatch as a springboard for discussion on the conceptualisation and measurement of poverty. A key purpose of the paper is to identify the relevant international literature and report on some of the findings, including some comparisons for New Zealand using data from the 2000 Living Standards Survey. The findings are set out in the context of a general framework for understanding the mismatch and lead to a discussion of the implications for the conceptualising and measurement of poverty, and for reporting on poverty trends. The paper advocates the use of a suite of measures rather than a single measure to better capture the multi-dimensional nature and complexity of poverty, and especially to assist with the understanding of the factors and processes that contribute to the exclusion of citizens from a minimum acceptable way of life in their own society because of inadequate resources.

INTRODUCTION

Poverty, especially child poverty, is back on centre-stage in the economically developed nations. This rise in interest in poverty means that the clarification of measurement and related conceptual issues has become even more pressing than before, especially for public policy. In March 1999, for example, Tony Blair announced the United Kingdom Government's commitment to eradicate child poverty within a generation, yet there was no robust poverty measurement regime in place to assess progress towards the goal. A subsequent public discussion document on measuring child poverty notes that "as we move forward, we want to be sure that we are measuring poverty in a way that helps to target effective policies and enables the Government to be held to account for progress" (Department for Work and Pensions 2002). New Zealand is in a similar position. The Government has committed to eliminating child poverty (Ministry of Social Development 2002), and the Ministry of Social Development is exploring options ['or regular reporting on poverty trends. The focus of this paper is on the relationship between the income approach to poverty measurement, and the outcome approach that measures achieved living standards.

At a general level a person or household can be said to be poor when their resources do not satisfy their needs. This begs the question of how to define resources and needs and how far they have to differ from each other for a household or individual to be identified as poor. To avoid the unhelpful situation of virtually everyone being classed as poor because their (self-defined) needs in terms of goods and services are not being met, the notion of minimum needs has to be introduced.

There has been a longstanding debate in the poverty literature as to whether these minimum standards should be defined in absolute or relative terms. The absolute notion is generally focused on those goods and services that are necessary for a person's physical existence (for example, nutrition, clothing, shelter and health care). On the other hand a relative definition takes as its reference the average and generally accepted standard of living in a given society at a given time and goes beyond what is required for mere physical existence. (1)

In the economically developed nations poverty is now almost universally conceptualised in relative terms. It is defined and assessed vis-a-vis the living standards of the society in question. The definition adopted in this paper is that poverty is exclusion from the minimum acceptable way of life in one's own society because of inadequate resources. The definition is explicitly relative, and includes both input and outcome elements. "Poverty is not just any limited social functioning, but specifically isolation that stems from the lack of economic resources" (Kangas and Ritakallio 1998:175).

This definition (or something similar) is "the most commonly used definition in the industrialised world" (UNICEF 2000:6). Its prevalence can be traced to the influence of Townsend's definition, which he promoted in the early 1970s.

Individuals, families and groups in the population can be said to be in poverty when they lack the resources to obtain the type of diet, participate in the activities and have the living conditions and amenities which are customary, or at least widely encouraged, or approved, in the societies to which they belong. Their resources are so seriously below those commanded by the average individual or family that they are, in effect, excluded from ordinary living patterns, customs and activities. (Townsend 1979:31) In the formulations since Townsend the precise wording varies but the essence is the same. Exclusion from a minimum acceptable way of life is sometimes spoken of in terms of "generalised deprivation" (2) Others use "unacceptably low living standards", where living standards is fairly narrowly understood in terms of consumption-based material well-being rather than more general notions of welfare, well-being or happiness. Whatever the exact formulation of the definition, the common ground is that "poverty is not just a state of affairs, it is an unacceptable state of affairs--it implicitly contains the question, what are we going to do about it?" (Alcock 1993:4).

In practice there are three broad approaches that are used for measuring material well-being and for identifying "the poor". (3)

By far the most common approach is to limit resources to economic or financial resources, and in particular to current income, and then to select one of a range of methods to determine where to "draw the line". Each method adopts some means of linking income to a minimum acceptable standard of living and/or participation in society, but without actually measuring the achieved outcomes. The main methods are budget standards, food or necessities ratios, focus group assessments of minimum income, consensual or "subjective" methods using individual responses, and relative income lines where the threshold is defined as an arbitrary proportion (usually 50% or 60%) of the mean or median. (4)

The second approach focuses on the outcome dimension and measures current living conditions directly, focusing on the consumption of goods and services, the ownership of items, and activities that require direct expenditure. Some studies simply use a stock-take approach and report endorsement rates for selected items, sometimes creating straightforward hardship scales based on aggregates of missing items. These studies assess deprivation in terms of simply not having the item or participating in the activity. No attempt is made to ascertain whether a particular lack is the result of preference or the result of financial constraint. Other studies use a more restricted notion of deprivation which focuses on the denial of the opportunity to have or do something because of limited finances. The locus here is on the result of financial constraints on people's choices, not just on the outcomes themselves. Again, simple aggregation is common, but some use factor analysis or other analytical techniques to investigate dimensionality or to finesse the aggregation. (5)

The third approach depends on survey respondents' assessments of their own income or living standards (the subjective approach), or for their views on the income or consumption needs of households in general (the consensual approach). These measures have an important place in the poverty literature but are not discussed in this paper. (6)

A key finding of recent poverty research is that there is a significant mismatch between poverty measured using an income approach and poverty measured directly in terms of observed deprivation or other indicators of unacceptably low living standards. The mismatch is substantial and is typically in the range of 50% to 60%. (7) This means that around half of those whose living standards are judged to be unacceptably low have incomes that are above the chosen income poverty line. Similarly, around half those who have incomes below the poverty line report consumption and living conditions that place them above the deprivation poverty line.

At first sight such a sizeable mismatch looks like a serious impediment for useful poverty measurement. Low current income, the most common yardstick used to measure poverty, is found to be an unreliable measure of poverty understood as "exclusion arising from lack of resources". It misses many who have unacceptably low living standards and counts many who have reasonable living standards but whose current income is low.

There is no simple way out by setting income aside and using direct outcome measures. There are both conceptual and empirical issues with direct outcome measures, just as there are with using income measures. (8)

The mismatch certainly cannot simply be ignored. Indeed, "unless one can explain how this [limited overlap] comes about, what it means, one cannot be comfortable about using income, deprivation, or both in measuring poverty" (Nolan and Whelan 1996b:3). (9) It can, however, be taken as a spur to greater endeavour, an opportunity to further develop the conceptualisation and analytical apparatus needed to better identify the poor and understand what the factors and processes are that contribute to poverty.

This paper takes the mismatch between poverty measures based on current income and those based on a direct assessment of current living conditions as a springboard for discussion on the conceptualisation and measurement of poverty. The paper:

* outlines a general framework for understanding the mismatch;

* identifies the relevant international literature and reports some of the findings, including some...