1. Geranda Notten, University of Ottawa Julie Charest, Statistics Canada
An evidence-informed rule to setting a poverty threshold - Illustrated with Canadian data -
Geranda Notten, University of Ottawa
Julie Charest, Statistics Canada
Canadian Economics Association - Annual Conference 2018

2. Where to set the poverty threshold?
Canadian Economics Association - Annual Conference 2018

3. Commonly used decision rules for setting the poverty threshold
Norms
Composite poverty indicators: union, intermediate & intersection identification criteria for second threshold
Single poverty indicators: poverty concept
Problem: either very extreme or leaving lots of space for arbitrary decisions
Budgetary or political
Threshold depends on government budget for poverty reduction or on the political message of a particular government at a particular time
Problem: inappropriate for measuring & tracking a societal phenomenon
Practical
Threshold depends on past practice, convention or other poverty indicators
Problem: the nature of poverty can change over time, may be different for different groups or societies, and conceptually distinct indicators may have different strengths and weaknesses in measuring poverty
Canadian Economics Association - Annual Conference 2018

4. Canadian Economics Association - Annual Conference 2018
Argument
Setting the threshold is usually the most influential choice when measuring poverty
Commonly used selection rules either leave much room for arbitrary choices or are problematic
We develop an evidence-informed rule to setting the poverty threshold, which:
Reduces the scope for arbitrary decisions
Relies on theory and data on the drivers & consequences of poverty
Works for unidimensional poverty indicators
Works when your data hold extra information closely associated with poverty
Canadian Economics Association - Annual Conference 2018

5. An evidence-informed decision rule
Review your data for additional information that, according to theory and empirical evidence, is closely associated with the poverty concept that you are measuring (i.e. a direct driver or consequence)
Set up a cross-validation frame that lists the attributes available in the data and their association with the likelihood of poverty (i.e. high / low)
Apply this to your observations so that each gets assigned a value for his/her likelihood of poverty
Look for the poverty threshold that optimizes the trade-off between (likely) false negatives and (likely) false positives
Canadian Economics Association - Annual Conference 2018

6. Illustration: a marginal increase of the poverty threshold….
Likely false negatives
Likely false positives
Canadian Economics Association - Annual Conference 2018

7. Illustration with Canadian data (I)
Canadian Survey of Economic Well-being (2013)
One time survey, supplement to Labour Force Survey
The only representative material deprivation data for Canada
Material deprivation is an objective, unidimensional, outcome-based poverty indicator
In Notten, Charest & Heisz (2017) we provide the first material deprivation estimates for Canada
See paper for more details on data, methodology & results
Canadian Economics Association - Annual Conference 2018

8. Material deprivation – indicator operationalization
Step 1: Derive deprivation items from 17 survey questions
“Are you and your household able to ….”
If yes → Not deprived
If no → Follow up question
“Is this because you cannot afford it, or for some other reason?" ”
If cannot afford → Deprived
If other reasons → Not deprived
Includes deprivation items such: eating fresh fruits & vegetables once a day, get regular dental care, cover an unexpected expense of $500 from own resources
Step 2: Aggregate deprivation items into a composite poverty indicator
Applying a counting approach, dual cut-off & a headcount poverty measure
Our big issue: Where to set the poverty threshold?
Canadian Economics Association - Annual Conference 2018

9. Where to set the poverty threshold?
Canadian Economics Association - Annual Conference 2018

10. Materially deprived persons in Canada and their likelihood of poverty
Variable
Status
Material deprivation
Deprived
Income
Low income
Low-middle income
High(er) income
Economic hardship
Yes No
Group A B C D E F
Likelihood of being poor
Highest
High
Low
Lowest
Canadian Economics Association - Annual Conference 2018

11. Material deprivation and (changes in) the likelihood of poverty
Canadian Economics Association - Annual Conference 2018

12. Material deprivation and (changes in) the likelihood of poverty
Canadian Economics Association - Annual Conference 2018

13. Material deprivation and (changes in) the likelihood of poverty
Canadian Economics Association - Annual Conference 2018

14. Material deprivation and (changes in) likelihood of poverty
Optimal threshold
Canadian Economics Association - Annual Conference 2018

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Conclusion
Poverty is a normative concept so normative judgements are unavoidable
Our decision rule makes some those judgements more evidence-based, more transparent, while also reducing the scope for arbitrary choices
Be they politically, budget, convenience or belief driven
The rule works
For unidimensional poverty indicators (low-income & material deprivation)
When your data hold extra information closely associated with poverty
When the task involves introducing new or updating old poverty indicators
Limitations
Optimal threshold depends on information & poverty risk assessment
Sample sizes typically too small for statistically significance of differences between false negative & false positive groups (esp. between neighbouring thresholds)
Canadian Economics Association - Annual Conference 2018

16. Canadian Economics Association - Annual Conference 2018
References
Notten, G. & Charest, J., An evidence-informed rule to setting a poverty threshold, (soon to be finished) draft manuscript, please contact if interested in a copy.
Notten, G., Charest, J., & Heisz, A. (2017), Material deprivation in Canada. Faculty of Social Sciences, University of Ottawa, 1-59.
Canadian Economics Association - Annual Conference 2018

17. Geranda Notten gnotten@uottawa.ca
Thank you!
Geranda Notten
Canadian Economics Association - Annual Conference 2018