3.1 Measuring Poverty and Inequality
3 min read•july 25, 2024
Poverty is a complex issue with various measurement approaches. focuses on basic needs, while considers societal standards. Different metrics like the and help quantify poverty and inequality.
These measures have limitations, though. They may not account for local cost variations, informal economies, or demographic differences. Despite challenges, these tools provide valuable insights into economic disparities and guide policy decisions to address poverty.
Poverty Concepts and Measurements
Absolute vs relative poverty
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- Absolute poverty
- Fixed income threshold below which individuals considered poor based on cost of basic necessities (food, shelter, clothing)
- Remains constant regardless of overall societal wealth changes (e.g. $1.90/day global poverty line)
- Relative poverty
- Defined in relation to overall standard of living in society typically set as percentage of median income (50% in many OECD countries)
- Threshold adjusts as society's overall wealth changes reflects social norms and expectations
- Key differences
- Absolute poverty focuses on meeting basic survival needs independent of societal context
- Relative poverty considers social inclusion and ability to participate in normal activities of society
Poverty threshold calculations
- Official Poverty Measure (OPM)
- Developed by Mollie Orshansky in 1960s based on cost of minimum food diet multiplied by three
- Adjusted annually for inflation using Consumer Price Index remains basis for many US poverty statistics
- (SPM)
- Accounts for government benefits (SNAP, housing subsidies) and necessary expenses (taxes, medical costs)
- Adjusts for geographic differences in housing costs provides more nuanced poverty picture
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- World Bank's $1.90 per day (2011 PPP) for extreme poverty used for global comparisons
- Higher thresholds for lower-middle-income (5.50) countries reflect varying living standards
Income inequality metrics
- Gini coefficient
- Measures income or wealth distribution on scale from 0 to 1 (0 = perfect equality, 1 = perfect inequality)
- Calculated using Lorenz curve which plots cumulative share of income against cumulative share of population
- and percentiles
- Divide population into equal groups based on income (e.g. top 20%, bottom 40%)
- Compare income shares across groups reveals disparities between top earners and rest of population
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- Ratio of income share of top 10% to bottom 40% focuses on extremes of income distribution
- Highlights gap between wealthy elite and struggling lower classes
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- Measure of wealth concentration relative to national income indicates level of wealth accumulation in society
Limitations of poverty measures
- Poverty threshold limitations
- May not accurately reflect local cost of living variations (urban vs rural areas)
- Fail to capture depth or severity of poverty beyond binary poor/not poor classification
- Do not account for non-monetary resources or social capital (family support networks, community resources)
- Gini coefficient criticisms
- Sensitive to changes in middle of distribution may miss important shifts at extremes
- Does not provide information on shape of distribution two very different distributions can have same Gini value
- General measurement challenges
- Difficulty capturing informal economy and unreported income leads to underestimation of true economic activity
- Asset valuation complexities in wealth inequality measures (real estate, private businesses)
- Lack of consideration for demographic differences (household size, age) affects comparability
- Data collection issues
- Underrepresentation of extremely poor or wealthy individuals in surveys skews results
- Potential for misreporting of income or wealth due to social desirability bias or tax concerns
- Time lags in data availability and analysis may not reflect current economic conditions
Key Terms to Review (12)
Absolute poverty: Absolute poverty refers to a condition where individuals lack the minimum amount of resources necessary to maintain basic living standards, such as food, clean water, shelter, and healthcare. This term is essential in understanding the severity of poverty levels globally, as it sets a clear benchmark for evaluating the most extreme forms of deprivation. It highlights the urgent need for intervention and policy solutions to address the dire circumstances faced by those living in absolute poverty.
Food insecurity: Food insecurity is the lack of reliable access to a sufficient quantity of affordable and nutritious food. It highlights the struggle many individuals and families face in securing enough food to meet their dietary needs, often due to economic instability, social inequality, or inadequate public policies.
Gini Coefficient: The Gini Coefficient is a statistical measure that quantifies income inequality within a population, ranging from 0 to 1, where 0 represents perfect equality and 1 indicates maximum inequality. It is often depicted in the Lorenz curve, which visually represents how wealth is distributed across a population. This coefficient helps in understanding economic disparities and evaluating the effectiveness of public policies aimed at addressing inequality.
Housing instability: Housing instability refers to the lack of consistent and stable housing, which may include frequent moves, living in temporary accommodations, or being at risk of eviction. This term is crucial when discussing poverty and inequality, as housing instability often exacerbates financial strain and limits access to essential resources, such as education and healthcare, impacting individuals' overall quality of life.
Income Percentiles: Income percentiles are statistical measures that divide the income distribution of a population into 100 equal parts, allowing for the assessment of income inequality and poverty levels. Each percentile represents a specific point in the income distribution, indicating the percentage of the population that earns less than a certain income level. This concept is crucial for understanding the relative economic standing of individuals or households within a larger context, highlighting disparities in wealth and opportunities.
Income Quintiles: Income quintiles refer to the statistical method of dividing a population into five equal parts based on their income levels. This classification helps in understanding income distribution, showing how income is spread across different segments of society, and providing insight into economic inequality and poverty levels within a population.
International Poverty Lines: International poverty lines are specific income thresholds established by global organizations to measure and compare poverty levels across different countries. These lines help define the minimum income level necessary to meet basic needs, such as food, shelter, and clothing, thereby providing a standardized way to assess poverty rates globally. They play a crucial role in understanding the extent of poverty and informing policies aimed at alleviating it.
Official poverty measure: The official poverty measure is a statistical tool used to determine the poverty status of individuals and families in the United States based on income thresholds that are adjusted for family size and composition. It connects to broader issues of measuring economic inequality by providing a benchmark for assessing the economic well-being of populations and informing public policy decisions related to social welfare programs.
Palma Ratio: The Palma Ratio is a measure used to assess income inequality within a population by comparing the share of income held by the top 10% of earners to that of the bottom 40%. This ratio provides insight into how wealth is distributed and highlights disparities in economic well-being. Unlike other inequality measures, such as the Gini coefficient, the Palma Ratio emphasizes the extremes of income distribution, making it a useful tool for analyzing economic inequality in a more focused manner.
Relative poverty: Relative poverty is a condition where an individual or group is unable to meet a standard of living that is considered acceptable within their society, resulting in a lack of resources compared to the average. This concept emphasizes the inequality in wealth distribution and social standing, highlighting that poverty is not just about income levels, but also about the ability to participate in society and access basic needs relative to others. It connects deeply with discussions about measuring economic disparity and global inequalities in development policies.
Supplemental poverty measure: The supplemental poverty measure (SPM) is an alternative method for measuring poverty in the United States, which provides a more comprehensive assessment of economic hardship than the official poverty measure. It considers additional factors such as government assistance, tax credits, and geographic variations in living costs, offering a clearer picture of how resources affect families' well-being.
Wealth-to-Income Ratios: Wealth-to-income ratios are a measure that compares an individual's or household's total wealth to their annual income. This ratio helps to assess the economic well-being and financial stability of individuals or families by illustrating how much wealth they have accumulated relative to what they earn each year. High ratios may indicate significant wealth accumulation compared to income, suggesting that wealth is not merely dependent on annual earnings, which is crucial for understanding poverty and inequality in society.