Absolute-Income-Based Measures of Poverty

POVERTY IS COMMONLY thought of as a state of deprivation in which individuals lack sufficient food, housing, clothing, medical care, and other basic items to maintain a decent standard of living. Income measures of poverty are rooted in the perspective that an individual, family, or household that lacks sufficient income to cover basic needs such as food and shelter is among the poor.

Absolute-income measures of poverty are relatively straightforward and simple to use. Some experts argue, however, that such measures are simplistic and do not capture the multidimensional complex nature of poverty. A common alternative measure to an absolute measure of poverty is a relative measure of poverty. Relative-income measures of poverty are characterized by comparing one income or standard of living to the living standard of a reference group, commonly the mean or median national income of a similarly structured household. Relative measures of poverty tend to produce a higher number of people defined as poor compared to using an absolute-income-based measure. Alternatively, poverty in the United States is different from poverty in developing nations. A person might be considered poor in the United States, but relative to people in developing countries, this person would be considered as not poor.

Absolute-income-based measures of poverty provide a monetary figure as a cutoff for being counted among the poor, and families fall either at the level, above it, or below it. This minimum level is generally referred to as the poverty line. The line that designates descent into poverty is somewhat arbitrary. For example, two families of similar structure, one that lives at $10 above the line and one that lives at $10 under the line, are really not different, even though one is officially counted among the poor. Critics of absolute measures of poverty argue that it results in undercounting the number of people who live in poverty conditions.

What is needed to meet basic needs varies across time and societies. Therefore, different countries establish poverty lines that are appropriate to their levels of development, society norms, and values. The official rate of poverty in the United States is estimated by the U.S. Census Bureau based on an absolute measure of poverty, which is collected in an annual survey. The official rate is determined by combining the money income of individuals and families before taxes with cash [Page 2]assistance received from government programs and comparing this level of financial income with established poverty thresholds. In the United States, such absolute-income-based measures of poverty are established using a set of money income thresholds that vary by family size and composition (ages of members). If a family's total income is less than the threshold, then that family and each individual in it are considered to be in poverty. These poverty thresholds are a national measure and do not vary geographically, but are updated for inflation using the Consumer Price Index.

This absolute definition of poverty uses money income before taxes and does not include capital gains or noncash benefits such as Medicaid, food stamps, or public housing. Thresholds and poverty status are intended for use as a statistical yardstick, not a complete description of what people and their families need to live. For example, for a family of five with two children, with a mother, father, and grandmother, the poverty threshold would equal $22,509 dollars in 2003. Based on official poverty thresholds, 12.5 percent of American households were in poverty in 2003. Despite imperfections, official poverty thresholds are widely used and have been for decades. They continue to be especially useful for assessing long-term changes in the national rate of poverty. Additionally, eligibility for many means-tested social welfare programs are based on poverty thresholds or a percentage thereof.

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