The poverty threshold, or poverty line, is the minimum level of income deemed necessary to achieve an adequate standard of living. In practice, like the definition of poverty, the official or common understanding of the poverty line is significantly higher in developed nations than in developing countries.

Almost all societies have some citizens living in poverty. The poverty threshold is useful as an economic tool with which to measure such people and consider socioeconomic reforms such as welfare and unemployment insurance to reduce poverty.

Determining the poverty line is usually done by finding the total cost of all the essential resources that an average human adult consumes in one year. This approach is needs-based in that an assessment is made of the minimum expenditure needed to maintain a tolerable life. This was the original basis of the poverty line in the United States, whose poverty threshold has since been raised due to inflation. In developing countries, the most expensive of these resources is typically the rent required to live in an apartment. Economists thus pay particular attention to the real estate market and housing prices because of their strong influence on the poverty threshold.

Individual factors are often used to handle various circumstances, such as whether one is a parent, elderly, a child, married, etc.

Defining poverty thresholds

Poverty thresholds can be defined in different ways:

• Social Security benefit based. If a government guarantees to make income up to some particular level then it may be presumed that that level is the poverty threshold. This is a problematic definition, because an uncharitable government may reduce the guaranteed income, thus reducing the incidence of poverty so defined while increasing the incidence of actual poverty.
• A relative income line, related to some fraction of typical incomes. This excludes the wealthiest individuals from the calculation. For example, the OECD and the European Union uses 60% of national median equivalised household income.
• A relative figure fixed in time and only adjusted for inflation - thus avoiding the possibility that if income inequality increases, then poverty may otherwise also increase.
• When the World Bank calculates its "$1 a day" statistics, it uses a poverty threshold.

Absolute poverty

A measure of absolute poverty quantifies the number of people below a poverty threshold, and this poverty threshold is independent of time and place. For the measure to be absolute, the line must be the same in different countries. Such an absolute measure should look only at the individual's power to consume and it should be independent of any changes in income distribution. Such a measure is only possible when all consumed goods and services are counted and when PPP-exchange rates are used (see purchasing power parity). The intuition behind an absolute measure is that mere survival takes the same amount of goods across the world and that everybody should be subject to the same standards if meaningful comparisons of policies and progress are to be made. Notice that if everyone's real income in an economy increases, and the income distribution does not change, absolute poverty will decline.

Furthermore, the rate of absolute poverty can decline even though inequality is increasing - as long as the poorest get a higher real income than they had before.

This type of measure is often contrasted with measures of relative poverty (see below), which classify individuals or families as "poor" not by comparing them to a fixed cutoff point, but by comparing them to others in the population under study. (The term absolute poverty is also sometimes used as a synonym for extreme poverty.)

Relative poverty

See also: Relative deprivation

A measure of relative poverty defines "poverty" as being below some relative poverty threshold. An example is when poverty is defined as households who earn less than 50% of the median income is a measure of relative poverty. Notice that if everyone's real income in an economy increases, but the income distribution stays the same, relative poverty will also stay the same.

Relative poverty measurements can produce odd results in small or unusual populations. For example, if the median household in a wealthy neighborhood earns US$1 million each year, then a family which earns "only" US$100,000 would be considered poor on the relative poverty scale. At the other end of the scale, if the median household in a very poor neighborhood earned only 50% of what they need to buy food, then a person who earned that amount would not be considered poor on a relative poverty scale, even though the person is clearly poor on an absolute poverty scale.

Measures of relative poverty are almost the same as measuring inequality: If a society gets a more equal income distribution, relative poverty will fall. Following this, some argue that the term 'Relative Poverty' is itself misleading and that 'Inequality' should be used instead. They point out that if society changed in a way that hurt high earners more than low ones, then 'relative poverty' would decrease, but every citizen of the society would be worse off. Likewise in the reverse direction: over the last few centuries, many countries have lowered their absolute poverty while increasing their relative poverty.

The phrase relative poverty can also be used in a different sense to mean "moderate poverty" – for example, a standard of living or level of income that is high enough to satisfy basic needs (like water, food, clothing, shelter, and basic health care), but still significantly lower than that of the majority of the population under consideration.

Problems with using a poverty threshold

Using a poverty threshold is problematic because having an income marginally above it is not substantially different from having an income marginally below it: the negative effects of poverty tend to be continuous rather than discrete, and the same low income affects different people in different ways. To overcome this problem, poverty indices are sometimes used instead; see income inequality metrics.

A poverty threshold relies on a quantitative, or purely numbers-based measure of income. If other human development-indicators like health and education are used, they must be quantified, which not a simple (if even achievable) task.

Public and private charitable gifts are not counted when calculating a poverty threshold. For example, if a parent pays the rent on an apartment for an adult daughter, that money does not count as income to the daughter. If a church or non-profit organization gives food to an elderly person, that also does not count as income. Rea Hederman, a senior policy analyst in the Center for Data Analysis at the Heritage Foundation, in the United States, complained,

The official poverty measure counts only monetary income. It considers antipoverty programs such as food stamps, housing assistance, the Earned Income Tax Credit, Medicaid and school lunches, among others, "in-kind benefits" -- and hence not income. So, despite everything these programs do to relieve poverty, they aren't counted as income when Washington measures the poverty rate. [1]

See also

• Measuring poverty
• List of countries by percentage of population living in poverty
• Poverty in the United States

References

Ray, Debraj 1998, Development Economics, Princeton University Press, ISBN 0-691-01706-9.

External links

• History of the U.S. Poverty Line by Tom Gentle, Oregon State University.
• United States Department of Health and Human Services Poverty Guidelines, Research, and Measurement
• 2007 United States Department of Health and Human Services Poverty Guidelines