Counting the Poor
ABSTRACT
It has been noted in the literature that failure to meet the target set by government for reducing the headcount ratio of poverty in Britain is partly due to the success of government policy in generating economic growth, However there is another way of evaluating government policy. If the purpose of poverty reduction is to reduce the incidence of social exclusion faced by identifiable groups, then other aspects of policy have to be examined for internal consistency. Measures of poverty which better capture the sense of exclusion are needed, and an exclusive focus on the target headcount ratio is not helpful.
JEL CLASSIFICATION: D31, I32, I38
A. N. Angeriz*1 S. P. Chakravarty+2
*Welsh Economy and Labour Market Research (WELMERC)
Department Of Economics
Singleton Park
University of Wales
Swansea, SA2 8PP
UK
+WELMERC and The Business School, University of Wales, Bangor, Gwynedd, LL57 2DG, UK
Helpful discussions with Vani Borooah, Chris Galbraith, David Hojman and constant advice and encouragement from John Treble are acknowledged. They are, however, not responsible for any remaining errors. The work was partially funded by a grant from >>>> to John Treble.
August 2003
Counting the Poor
I. Introduction
This paper is concerned with identifying issues that require examination for evaluating poverty reduction policies. An exclusive focus in policy evaluation on the target headcount ratio either to criticise or to justify the policy is unwarranted. The underlying rationale for poverty reduction policy need to be examined even if the goals of the policy are expressed in the form of crude targets about the head count ratio of the poor. Thus the argument that the "main reason why it has proved so hard for the Government to reduce the child poverty count" is the "focus on relative rather than absolute income" (Brewer et al 2003) is not a sufficient defence of government policy.[1]
In November 1998, the Statistical Programme Committee of the European Union agreed on a poverty line based on the median income. In the EU countries, anyone having an income below 60 per cent of the median income is defined to be poor. Thus the poverty datum line for income changes over time. When governments set targets about reducing the percentage of those who are poor, the targets are set by reference to the above changing line. In setting these targets, no explicit indication may be given about how the median income is expected to change over time. There may be no explicit statement about acceptable changes in income inequality. No explicit target, for example, is set for the rate of change in the median income with respect to the mean;[2] and a degree of ambiguity is apparent about the expected changes in income distribution in the context of which targets for the headcount ratio of poverty are set. This ambiguity cannot be resolved by re-interpreting the targets, ex post, by reference to some absolute poverty line that was not contemplated when the goals for poverty reduction were announced.
The question of the efficacy of government action is not a numbers game, which can be settled by reference to a single number, the target head count ratio. Instead, the views of social exclusion that might have informed the relevant aspects of policy need to be examined. It is reasonable to surmise that the purpose of poverty reduction policy in Britain in the context of the rhetoric about child poverty is to reduce the incidence of social exclusion by an identifiable group, households containing children. The success of government in the pursuit of the reduction of child poverty as a goal then has to be measured by the ability of policy to reduce the incidence of social exclusion by this group. The potential for continuing success of the policy has to be gauged by examining the characteristics of those who remain poor.
A measure of the incidence of exclusion experienced by a particular group -- for example, households where children are present -- is the headcount ratio of poverty in this group. Another measure might be the contribution to aggregate poverty by this particular group of households. One might probe further into the experience of poverty in those households where children are present.[3] One might go even further and ask if those households with children who have remained poor have different characteristics from those who have been pulled out of poverty by policies that have been applied. The question concerns not just whether a policy was effective, but whether it would remain effective.
The object is not necessarily to arrive at a summative judgement on policy, but it is to examine the issues that might have informed policy and to press the argument for vigilance about internal consistency of policies that are adopted. This approach to evaluating policy entails a move away from the exclusive focus on the head count ratio of child poverty. Instead, an examination of the trends of a more general index, the FGT(α) index, of poverty is needed. The headcount ratio is a special case of this index. The rationale for the choice of FGT(α) is discussed in greater detail in Section III below.
The paper is organised as follows. Section II discusses conceptual issues underlying measures of poverty and examines the link between poverty and income distribution. Section III describes how this link might be found in the distribution of income amongst the poor themselves by examining the FGT(α) index of poverty. A property of this index is that it can be additively decomposed to calculate the share of contribution to poverty by mutually exclusive and exhaustive groups -- for example, single parent households, households with children and more than one adult, pensioner households, and others -- whose income lie below the poverty datum line. Section IV describes the Family Resources Survey data and Section V applies the ideas discussed in Section III to this data set for the years 1996/97 to 2001/02. An estimate of the taxes that are paid and benefits that are received as transfer payments is also provided. Section VI concludes and suggests how the findings reported in this paper may be further examined.
II. Measurement of Poverty
The definition of the poor as those whose income falls below some poverty datum line raises the question of how the poverty line is to be delineated. There are two ways that this problem is generally approached.
i. The first is to define some minimum level by reference to physical requirements -- for example, nutritional requirements -- for survival.
ii. The second is "to endeavour to define the style of living which is generally shared or approved in each society and find whether there is ... a point in the scale of the distribution of resources below which as resources diminish families find it particularly difficult to share in the customs activities and diets comprising their society's style of living" (Townsend 1979).
Both the above approaches raise difficult conceptual issues. How do we define the physical requirements for survival?[4] How do we define the "style of living" approved by society?[5]
On reflection, it appears that the distinction between relative and absolute poverty is not as sharp as it might seem at first sight. Relative prices are not independent of the distribution of income. As more people acquire cars and buses run with empty seats, those who have to depend on buses for transport have to carry a greater fraction of the fixed cost of bus service. Changes in income distribution may lead to changes in relative prices. This, in turn, may lead to a change in what and how much the poor can buy with a fixed sum of money. Thus the subsistence level of income, often thought of as some absolute level, is itself a relative concept.[6]
Another reason for introducing the distribution of income into poverty measures is that goods in themselves do not provide utility; they empower an individual with the capabilities for securing utility. For example, a bicycle is a good. Being able to go from A to B is a capability. The capability derived from a good depends on the distribution of income. If poverty is measured not in terms of the lack of ability to buy certain goods but in terms of the lack of capability to do certain things, then relative deprivation in terms of goods could sometimes result in absolute deprivation in terms of capabilities (Sen, 1983). A simple if concocted example might be as follows: Suppose the purpose of acquiring a good (say a car) is to enable one to visit friends. If most people do not have cars, friendship is generally made amongst those who live within walking distance of each other. If, instead, most people have cars, social customs might change and contact with neighbours might become less important. Now the few who cannot afford cars could suffer a special disadvantage due to their inability to afford cars. They cannot visit friends.[7]
Nowadays, most governments in OECD countries use a measure of poverty related to the mean or the median income of the population as a whole. The United States remains an exception, where the US Census Bureau continues to calculate an absolute measure notwithstanding recommendations to the contrary by a panel of the American Academy of Sciences. The methodology is informed by the ideas of Mollie Orshansky, who developed a technique for calculating the subsistence budget by combining data on household 'choice' (Household Consumption Survey) with some bureaucratically-defined level of minimum food requirement (Orshansky, 1966).[8] The British government’s position is that the absolute standard -- the backbone of the Beveridge approach characterising much of post-war social security policy -- has been superseded by "a notion of a relative minimum with all groups in society having a share in the long run increase in national prosperity."[9]
There are basically two aspects of the distribution of income which enter into the calculation of poverty indices. The first is the distribution of income in the population as a whole and the second is the distribution of income amongst those who are poor. Governments in most OECD countries do not over-concern themselves with changes in the right hand tail of the income distribution in deciding on the poverty line. This line is set by reference to the median rather than the mean income.
The distribution of income enters into measures of poverty also in another way. Agreement about the poverty datum line only allows for the headcount ratio, the proportion amongst the population of those who fall below the poverty line. If it is accepted that the measure must reflect the difference in how poverty is experienced by those who fall much below the poverty line compared to those who are just under that line, the headcount ratio needs to be enriched with a welfare function-based measure. The welfare function is needed to capture the normative value that is placed by society on the distribution of income amongst the poor.
III. A Decomposable Index of Poverty
The FGT(α) index of poverty is a candidate for consideration. This index is chosen here also because it is decomposable. Suppose that there are n number of units (say individuals in households) in society of whom m have income below the poverty line Z.[10] Suppose that these households are divided into k distinct (ie.: mutually exclusive but exhaustive) subgroups. FGT(α) can be additively decomposed to isolate the experience of the depth of poverty by different groups – eg. single parents couples with children pensioners living alone, etc. There are also other properties of FGT(α) that make it particularly suitable for examining the question of social exclusion suffered by a particular group of the poor, for example, households containing children.
The attraction of this index becomes apparent by following the literature on the development of poverty indices. Once the poverty datum line is agreed, then the next question arises: how is poverty to be measured? The simplest approach is to count the ratio of people whose income falls below the poverty line. This measure is provided by the Head Count Ratio (H).
This ratio tells us something about the extent of poverty prevalent in that society. But to develop a better understanding of the extent of poverty we need to know, also the distribution of income of those who fall below that line. The simplest approach would be to construct an index by adding up the feeling of deprivation, measured along a scale that makes possible inter-personal comparison of those who are poor. The Poverty Income Gap, I, is a candidate for this index. It attempts to capture the intensity of deprivation by adding up the amount of income needed to be transferred to the poor in order to bring all of them up to the datum line level of income (Beckerman and Clark 1982). In order to make the measure independent of the number of the poor and the currency in which poverty is income is recorded, this index is commonly normalized, producing the Poverty Income Gap Ratio, P.
where m denotes the number of units (say, households) enjoying an income below the datum line, Z. The income for this set of units is the set {y1 ... ym}, where yi < Z for all values of i = 1,…,m.
The problem with P is that it does not satisfy the Transfer Axiom, which is a desirable property of any poverty index. This axiom entails that "a pure transfer of income from a poor [household] to any other [household] that is richer must increase the poverty measure" (Foster et al 1984 p.762). We note that, as long as both the households are below the poverty line of income to begin with and neither crosses that threshold due to the transfer, then P does not increase if income is transferred from the poor to the less poor. This inadequacy is addressed by Sen (1976), who provides an index that combines the head count ratio with the Gini coefficient of distribution to obtain a measure of the depth of poverty. For large values of m, the Sen index, S, is defined as follows: