SEATTLE — Although poverty rates are essential to tracking global progress, measuring poverty by gross income may not be ideal. Discrepancies between poverty and gross income have led researchers to believe that measuring poverty by consumption may be the best way to measure poverty.
Researchers criticize current poverty-measuring methods for relying heavily on pre-tax income and excluding non-cash benefits such as food stamps and housing subsidies, thus inaccurately reflecting the resources available to low-income households.
Income-based measurements also tend toward volatility, as families can experience temporary losses or gains from sudden unemployment, mid-career changes or variations in self-employment income.
Gross income is also an inaccurate representation of a household’s purchasing power. Researchers from the University of Wisconsin-Madison noted a drastic difference between income and spending in 1994 when the Labor Department reported an average gross income of about $6,800 and average spending of about $14,000.
On the other hand, adopting a consumption-based measure would better reflect the situation of the most disadvantaged by accounting for savings usage, access to anti-poverty programs and ownership of durable goods. A consumption-based measure would also identify those who live above the income poverty line but spend the majority of their income on food or health care, rendering them unable to afford proper housing.
The World Bank also reports that consumption surpasses income as an “outcome indicator,” being more closely related to a person’s welfare. For example, consumption-based measures account for access to and availability of resources, while income-based measures do not.
In developing countries, where agriculture represents the largest employment sector, measuring income is difficult. Farmers must exclude inputs purchased for agricultural production from their revenue and may not account for produce bartered for other goods.
However, a consumption-based measure still has major flaws, and isn’t the best way to measure poverty, especially when it comes to surveying and analyzing data. Angus Deaton, Nobel Prize laureate, reports that variances in price and quality of goods depending on location present a challenge to consumption-based models for measuring deprivation. Deaton offers a solution to this obstacle in his research on how to exploit variation in unit values in order to construct local market prices.
Another drawback of a consumption-based index lies in the fact that poverty is typically defined at the individual level while consumption is measured at a household level, in which children are assumed to consume as much as adults. Deaton’s research reveals that children actually consume 60 to 70 percent less. Basing indexes on household consumption data, therefore, would result in overstating poverty rates among households with children.
A consumption-based model, when factoring out income, also presents the possibility for frugality to be mistaken for poverty.
What then is the best way to measure poverty? Fusing the advantages of both income and consumption-based measurements seems key to addressing the disadvantages of each.
– Daniela N. Sarabia