Relative poverty rates can mislead

Many researchers and policy makers favor a “relative” measure of poverty. That’s because our notion of what constitutes a minimally acceptable standard of living tends to be shaped by what’s typical in our own society. This approach dates back at least to Adam Smith. Its contemporary popularity owes much to Peter Townsend and Amartya Sen, and to the fact that the European Union’s official poverty measure is a relative one.

A relative poverty measure is essentially a measure of inequality within the bottom half of the income distribution. As long as this is made clear, such a measure can serve a purpose. But it’s fairly common for commentators to refer to a relative poverty rate as though it’s an indicator of absolute well-being. A journalist or opinion writer or researcher may say something like “We’ve failed to make things better for the poor; the poverty rate is the same now as a decade ago.” When hearing this, some (many?) of us will assume it reflects stagnant incomes for households at the bottom. But low-end incomes may actually have increased; that can happen without yielding any reduction in the relative poverty rate if incomes in the middle rise too.

Consider the experiences of six rich nations from the late 1970s to the mid-2000s. The following charts show trends in relative poverty and in absolute inflation-adjusted household income at the tenth percentile (a good proxy for “the poor”) in three of the six: the United States, Canada, and Germany. In each of these three countries the relative poverty rate increased slightly over the period. And in each of them absolute incomes of low-end households were flat or increased only minimally. Relative poverty rates and absolute incomes tell a consistent tale.

The story is quite different in Sweden, Norway, and Ireland. Here too relative poverty rates were flat or slightly rising. But in these three countries the absolute incomes of low-end households increased by a substantial amount. The reason the relative poverty rate in these countries didn’t fall is that household incomes at the median increased just as rapidly.

Relative poverty is of some interest, to be sure. But to avoid confusion, we might do well to sometimes refer to it as “lower-half inequality.”

2 thoughts on “Relative poverty rates can mislead

  1. I dispute your conclusion that a poverty rate (or whatever stat you want) is related to inequality within the lower half or so of the income ladder.
    If you have a really skewed economy – where , to keep the math simple, 99% of income goes to the top 1%, then the median income is still quite poor (eg, a feudal lord and serfs, with no knights).
    I don’t know how this relates to the US circa 2011, but we need some data here

    Another problem is what constitutes a reasonable std of living.
    My impression of the housing boom is that part of the problem is that media saturation, focused on the wealthy, lead people to think that living like D Trump is “normal”
    True, there are a lot of ifs in that statement, but I’m pretty sure I’ve seen references to peoples views of normal being distorted.

    There is also an issue, as i’m sure you know, that “family wealth” is as important or more important then income

    Another problem with your argument is that precisely because poverty is relative, it is relative…if poor people get better, but at a slower rate then rich people, then in their minds (which, with apologies to mathematical economics, is what counts) they are worse off…it is common to make fun of poor people who have color tv with cable, but color tv with cable is based on what people think, which if you meet minimal stds of nutrition etc, is what counds

  2. sir is it right to say that poverty should always be calculated at aggregate level and not at micro level .

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