Children in poor families: does the source of family income change the picture?

• Author: Krishnan, Vasantha

Abstract

This paper focuses on children who have been statistically classified as "poor" or "in poverty" because their families' resources fall below a specified "poverty threshold". The measure of poverty used is based on family income and accommodation costs, standardised to take account of family size. The paper examines (a) trends in the source of income for children below the specified poverty threshold and (b) the extent to which such children are found to differ in their living standards, characteristics and circumstances according to whether the main source of family income is from government transfers or market income. The analysis shows that the proportion of children below the specified poverty threshold rose from the late 1980s, peaked in 1994, and then fell back slightly. The proportion of children with government transfers as their main source of family income also rose. Standard of living data show that poor children reliant on government transfers are more likely to be subject to restrictions in key items of consumption than are poor children in families with market income. The results demonstrate that there is considerable variation in the living standards of those below the poverty threshold, and suggest that poor children in families with government transfers as the main income source are a particularly vulnerable group and warrant a policy focus that recognises their multiple sources of disadvantage.

INTRODUCTION

There is an extensive body of research suggesting that low parental income in childhood is commonly associated with a range of negative outcomes for children. These include lower educational attainment, reduced participation in employment as adults, and lower adult earnings (Child Poverty Action Group Inc. 2001). The strength of association increases with the persistence of the experience of low income, and can vary according to the stage in a child's life when that experience occurs (Hill and Jenkins 1999, Bradbury et al 2000).

A recent analysis of literature on the statistical associations between low family income and child outcomes concludes that these associations arise through complex processes that involve more than just an income effect, and party reflect the tendency of other child risk factors to be correlated with low parental income (Mayer 2002). The persistent association between parental income and children's outcomes is partly due to family background characteristics that result in both low parental income and worse life chances for children. However, after mediating factors are taken into account, it appears that income has a modest effect on child outcomes.

There is debate about just how parental income affects child outcomes. The relationship appears to be non-linear, with negative effects being largest over the income range that distinguishes partial deprivation to severe deprivation. Families that are poor for a long time tend to be different from other families. Persistently poor families are much more likely than other families to have a caregiver suffering from depression, anxiety or other psychological problems, physical health problems, low cognitive skills, drug or alcohol abuse or other problems. These factors, taken in combination, reduce the likelihood of consistent and nurturing parenting.

Finally, receipt of welfare income is negatively associated with children's outcomes, even when level of income is controlled. This effect derives not so much from welfare receipt per se, but from parental characteristics that make some parents more prone than others to be on welfare (Mayer 2002).

Taken together, the findings suggest that children in families reliant on welfare may be particularly vulnerable to negative outcomes, being not only relatively poor but also more likely than children generally to have other disadvantages. The findings suggest substantially lower vulnerability among children supported by market incomes who are not poor, with an intermediate level of risk found among children supported by market income but who are relatively poor.

MEASUREMENT OF POVERTY AND ITS RELATIONSHIP WITH LIVING STANDARDS

The notion of poverty used in statistical measurement is one based on the limitation of economic resources of families or households. In its simplest formulation this means being below an income threshold. The measurement procedure can be made more sophisticated by taking into account other factors that may have implications for the resources available for day-to-day consumption. The Housing-adjusted Equivalised Disposable Income (HEDY) metric is one such formulation. This type of restricted statistical definition of poverty permits useful results on trends and inter-group relativities to be obtained from analysis of routinely collected statistical information (for example, information collected by Statistics New Zealand's regular Household Economic Survey). Its limitations are that it does not recognise that families with the same income, or same HEDY value, will have differing living standards (resulting from differences in their levels of financial assets, levels of debt, etc.), and does not take account of the differences in incomes of those below the threshold (which is an inevitable consequence of using the simple but crude binary classification of "poverty"/"not poverty").

The traditional formulation of poverty, as found in such early writers as Rowntree (1901) and Booth (1903) begins with a much broader notion of poverty that focuses on the consequences of restricted financial resources and reports on the extent to which people are unable to meet their basic needs. There is a tradition of empirical research on these matters that in England extends from Rowntree to Townsend to Mack and Lansley (in their studies of Poor Britain), which draws on this tradition and collects data on hardship in terms of its various manifestations.

The present paper uses information of the latter type in combination with information permitting the sort of standard statistical poverty classification referred to earlier. It thus permits a distinction to be made between poverty in the limited statistical sense, and the picture that emerges when living standards data are used to describe the extent to which people are in hardship.

STRUCTURE OF THE ANALYSIS

The purpose of this report is to test the hypothesis specified in the introduction, using data derived from Statistics New Zealand's Household Economic Survey (HES) (2) and the Ministry of Social Policy's 2000 Survey of Living Standards. The analysis will establish the extent to which the living standards, circumstances and characteristics of poor children (defined in a narrower statistical sense) vary depending on whether the families' main source of income is government transfers or market income. It will examine this in the context of a brief historical survey that will show changes in the incidence of poverty over the past decade. The analysis will primarily focus on answering the following seven questions:

* How has the incidence of poverty among children changed over time?

* How have the sources of family income for children changed over time?

* Why is the incidence of poverty among children reliant on different sources of family income and how has this changed over time?

* How has the distribution of poverty and income source status changed among children?

* How have the family income sources of poor children changed over time?

* How do living standards compare among poor children according to whether they are reliant on government transfers or market income, and how does this compare with all other children?

* How do the family characteristics of poor children reliant on government transfers compare with those reliant on market income and all other children?

The above questions will be examined in relation to three groups of dependent children:

* poor children whose main source of family income is government transfers;

* poor children whose main source of family income is market income; and

* all other children (i.e. those in families who are above the specified poverty threshold).

This report will outline the implications of differences for determining which group of children may be more at risk of low living standards, persistent low income and negative child outcomes that may be a consequence of the economic disadvantage. The paper will also outline the implications of the findings for the development of policies to prevent disadvantage and poor outcomes among New Zealand children.

CHANGES IN THE INCIDENCE AND DISTRIBUTION OF POVERTY AMONG CHILDREN

In this section of the paper, we outline what has been a changing landscape in terms of the incidence and distribution of poverty among dependent children in New Zealand over the past decade. The definition of poverty used in this study is based on a housing-adjusted equivalent disposable income (HEDY) distribution and is benchmarked to what was 60% of the median on the HEDY distribution for the 1997-98 HES year. HEDY adjusts the conventional measure of Equivalised Disposable Income (EDY) to take account of variations in housing cost. This procedure is defined in Jensen and Krishnan (2001), where an analysis based on HEDY is presented. HEDY is also the basis for the results given in the 2001 Social Report (Ministry of Social Policy 2001b).

In this study, children with HEDY values below the 60% of median HEDY benchmark are described as "poor", with those above described as "not poor". All data have been price adjusted to year 2000 dollars using the Consumer Price Index (CPI) for all groups, less housing. The rationale for this approach also lies in recent reports on poverty and income adequacy that highlight the significance of housing cost as a factor affecting living standards. This is particularly the case for families with dependent children (see Stephens et al 2000, Waldegrave and Sawrey 1994). The relatively liberal 60% HEDY threshold...