International trends in poverty: how rates mislead but intensity and labour supply matter Lars Osberg - Department of Economics, Dalhousie University - Institute for Social and Economic Research University of Essex

Is Poverty Increasing or Decreasing? Poverty reduction: “success” for social policy Most common measure is poverty rate Freeman (2001); Dickens & Ellwood (2001) Issue: workless households & poverty Can renewed expansion in USA decrease poverty still more ? Is program design behind UK increase ? Workless households are poorest of poor, poverty gap is their key issue Poverty rate is insensitive

Why is Poverty Rate still used? Are alternative measures technically inferior ? Do plausible measures all give same answer ? Are alternative measures too hard to communicate ? Do all measures lead to same perceptions about policy ? NO TO ALL

Is there a better Index of Poverty ? Sen (1976) & large literature since Depth of Poverty also matters Principle of transfers – transfer from poor person to richer person increases poverty NOT satisfied by Poverty Rate Implications of focus on Rate of poverty: Can achieve “success” by creaming off marginally poor Move goalposts ?False Negatives ? Axioms + Communicability => Useful + Used focus, monotonicity, symmetry, replication invariance, transfer sensitivity, continuity + communicable

Poverty Intensity Sen-Shorrocks-Thon (SST) Index. P = (RATE ) (GAP ) (1+G (X )). Empirically: inequality of poverty gaps [1+G (X)] is very nearly constant. SST = volume of Box, one dimension nearly constant. Changes over time, differences across jurisdictions can be approximated by. RATE x GAP. Poverty Box – in 2 dimensions. Poverty Intensity proportional to area RATE X GAP.

But does it matter ? Do we get the Same Results ? Luxembourg Income Study data Canada (71,75,81,87,91,94,97), Sweden (75,81,87,92,95), UK (74,79,86,91,95), USA (74, 79, 86, 91, 94,97), Germany (81,83,89,94) After-tax, after transfer equivalent income LIS equivalence scale: Y i = Y f / N 0.5 Relative poverty line = ½ median equivalent Absolute – freeze national in real $ Slow/nil growth in median real incomes after 1975 implies fairly small differences in actual poverty line

Same Cross Sectional Country Rankings ? In Mid 1990s Luxembourg Income Study data, the average poverty gap differs significantly Implication: country rankings by poverty intensity frequently diverge from rankings by poverty rate

Qualitative Conclusions Re: Poverty Trends Often Differ Relative poverty in early 1990s ? Canada, UK, Sweden: intensity & rate disagree US & Germany: indices agree Over-all – 22 year/year comparisons 4 no change rate but change intensity 5 opposite direction change: intensity & rate 9/22 = 40% disagreement Absolute poverty line UK - poverty rate and poverty intensity change in opposite directions every time /79/86/91/95

Communicability ? The whole point of measuring poverty is to influence the policies that might affect poverty A poverty index not used or understood by the public & by policy makers is pointless Humans not very good at deriving accurate relative size information from tables of numbers. Quite good when presented as area proportionate graphs

Can better measures help policy analysis ? Trends in % Households with no earnings is a key issue, with big international differences Working & workless households differ hugely in % population, probability & depth poverty Easy to lose sight of relative size of issues Importance of Rate depends on size source population Poverty intensity = population weighted average of group poverty intensity = sum of areas of poverty boxes

Better Measurement Matters Poverty Intensity Preferable on theoretical grounds Makes a Difference to conclusions Often has different trend to poverty rate Easily communicated Decomposable Useful for policy evaluation Full Text available at: Click on “Publications” & scroll down