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Economics of Poverty Week 5

by: Aaron Notetaker

Economics of Poverty Week 5 ECON 2456

Marketplace > University of Connecticut > Economics > ECON 2456 > Economics of Poverty Week 5
Aaron Notetaker

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Definitions of poverty and various thresholds set by gov'ts
Economics of Poverty
D. Kennedy Jr
Class Notes
Economics, poverty
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This 3 page Class Notes was uploaded by Aaron Notetaker on Monday October 3, 2016. The Class Notes belongs to ECON 2456 at University of Connecticut taught by D. Kennedy Jr in Fall 2016. Since its upload, it has received 16 views. For similar materials see Economics of Poverty in Economics at University of Connecticut.


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Date Created: 10/03/16
Economics of Poverty Week 5 Absolute approach – beings with concept of minimal subsistence, some bundle of goods and services that is regarded as essential to the well-being of a family unit (base needs to survive). People in industrialized countries have a more generous definition of ‘minimum needs’ posing a problem for the absolute method. Relative approach – a person is poor if his income is significantly lower than the average income of the pop. Shows subjectivity of poverty and brings into consideration inequality. - Perpetuates poverty in a statistical sense (if a given poverty line is only relative to the average wage) - Says nothing about the quality of life of those at the bottom of income The Fuchs Point – those with incomes less than ½ of the national Median Income as poor The definition of poverty is essentially arbitrary, so is always open to criticism First national poverty line in the US set at $460 a year for a then-average family of 5 in the North and $300 for such a family in the South, derived from studies of consumption and budgets (Review from last week about the first US poverty threshold by Mollie Orshansky) The Federal Gov’t established official statistical definition of poverty in August 1969 using these thresholds (central threshold in 1936 set at about $3,100 for 2 adults, 2 children) 1992 threshold set at $14,228 for a 2 adult, 2 child family (up over $9000 from 30 years prior) Sources for Census Bureau Data on poverty are Current Population Survey (CPS) [typically for employment data) and Annual Social and Economic Supplement (ASEC). Based on a sample of about 95,000 addresses. Those who are homeless are therefore not counted in the poverty assessment. The Census Bureau’s Small Area Income and Poverty Estimates (SAIPE) produces estimates of median household income Cost-Of-Living Adjustment – Census Bureau uses the CPI-U-RS (a Consumer Price Index) to adjust for changes in the cost of living Official poverty definition uses income before taxes or tax credits and excludes capital gains and noncash benefits (SNAP or housing assistance Poverty thresholds – original version of the federal poverty measure, updated each year by Census Bureau to define and quantify poverty in the US Poverty guidelines – issued every year by Department of Health and Human Services, a simplification of the thresholds created for admin use, determining financial eligibility for programs. Both thresholds and guidelines are the same for all mainland states, regardless of regional differences in cost of living Differences between thresholds and guidelines - Characteristics by which they vary - How updated or calculated - Issuing agency - Use (statistical vs admin) - Funding (rounded to nearest dollar vs multiples of 10) - Timing of annual update National Academy of Sciences (NAS) Report (1995) – suggested a set of revisions to the official poverty measure (OPM). Critiques of OPM - Medical costs not included - Needs of working vs non-working - Price variations based on geography (particularly in housing) - Family size adjustments - Changes in standard of living (only updating for inflation) - Does not reflect policies that affect disposable income (Social Security, Food Stamp Program) RECOMENDATIONS of NAS to adjust poverty measure - Should reflect the circumstances of the nation’s families - Should represent a budget for food, clothing, shelter, utilities, and small allowance for other needs (household supplies, personal care, transportation) - Should reflect family types and geographic differences - Define family resources as a whole (including near-money benefits), based on the net of income minus expenses Supplemental Poverty Measure (SPM) [vs Official Poverty Measure (OPM)] released by US Census Bureau in 2011 – extends poverty measures. (detailed laid out comparison of official vs supplemental in table 3-6A in lecture slides). Most importantly, the Supplemental Measure uses a definition of income that is conceptually closer to resources available for consumption. - Includes co-residents/cohabiters - More detailed calculation for threshold o Separate thresholds for renters, homeowners with mortgage, and owners w/o mortgage - Geographic adjustments - Five year moving average of expenditures on FCSU (consumer prices) - Sum of cash income and noncash benefits minus taxes, work expenses, out- of-pocket medical expenses, and child support paid to another house. Both these measures are still conceptually limited by focusing on income-based measures of well-being. A better measure may be found in looking at consumption rather than income. For example, consumption is more accurately reported, income is often underreported. OPM poor: $26,886 SPM poor: $29,140 Consumption poor: $18,000 New Global Poverty Line was set at $1.90 a day in 2015 using 2011 prices (or $693.50/year) A global poverty measure standard was needed, even when using rich and poor countries. Examined national poverty lines from some of the poorest countries using Purchasing Power Parity (PPP) exchange rates PPP – the exchange rate between any 2 national currencies adjusts to reflect differences in the price levels in the 2 countries. Poverty is not an isolated topic and is closely linked to the topic of inequality


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