MEASURING POVERTY

1. MEASURING POVERTY Seminar for Statistics New Zealand Bob Stephens Senior Research Associate, Institute of Policy Studies, School of Government New Zealand Poverty Measurement Project Member, Advisory Group, Solutions to Child Poverty, Office of the Children’s Commissioner

2. Lecture Overview • Media: 20% children poor, but few 65+ • Defining Poverty • Why have a measure of poverty? • NZPMP and benefit cuts • Look at the concepts of poverty, data sources and analysis • Alternative ways of measuring poverty/ hardship • Use NZ data (NZPMP and MSD) and analysis to show results

3. Definitions, Quotes • NZPMP ‘A lack of access to sufficient economic and social resources that would allow a minimum adequate standard of living’ • Perry (MSD) ‘Exclusion from the minimal acceptable way of life in one’s own society because of inadequate resources’ • Children living in poverty are those who experience deprivation of income and material resources to develop and thrive, leaving them unable to enjoy their rights, achieve their full potential and participate as full and equal members of New Zealand society. (EAG?) • ‘Counting the poor is an exercise in the art of the possible. For deciding who is poor, prayers are more relevant than calculations because poverty, like beauty, lies in the eyes of the beholder’ (Orshansky 1958) • The afflictions of poverty not addressed by moving over the threshold, and some under threshold are resilient

4. The Need for a Poverty Measure • Social commitment to alleviate, provide long-term solution: • Monitor/evaluate impact of policy changes on standards of living of poor • New Right: poverty as an externality • Provide basis for determining adequacy of benefits • Determine relative incidence of poverty among social groups: -> targeting, tailoring • Mix of cash and in-kind benefits, or adequate wages • Determine causes of poverty to develop long term policies to reduce incidence, severity and persistence • Calculate costs to government of policies to alleviate and eradicate poverty

5. New Zealand Poverty Measurement ProjectCharles Waldegrave, Paul Frater, Bob Stephens • Impact of the 1991 Benefit Cuts, market rents for state housing on living standards • 12% cut in average social security benefit, larger cut <25, unemployed, less for invalids and pensions • Small local studies showing hardship, but ‘not statistically valid’. • Growth of food banks, special benefits, • No political monitoring of impact of benefit cuts, nor political response • NZPMP for statistical measurement of income poverty, put poverty on political agenda • Impact of doctors, teachers, housing on social outcomes • But issue of how to establish a poverty threshold, what measures/indicators of poverty to use

6. Ways of Measuring Poverty • Income-poverty: those families with an (equivalent) income below a threshold – NZPMP & MSD • Standards of Living: families that ‘go without’ items of expenditure due to income constraints (outcome measure) – MSD. ELSI and MWI -link with HES • Deprivation indices: census mesh-block areas with high incidence of sole parents, high unemployment, low incomes, rented property • Statics, comparative statics, d • Dynamic: persistence, inter-generational transmission • Some NZ results • Indicators/Additional Measures: health, education, housing, family circumstances • A (Child) Poverty Act??: measuring, indicators, monitoring, accountability.

10. Living Standards (MSD) 2001 & 2004 • Outcome measure, based on deprivation • Go without due to income constraint, not choice • Items range from necessities to luxuries • Ownership restrictions, social participation, economising, financial, accommodation • Same groups poor as Income measure, though 65+ better living standards (home ownership, assets) • But only 50% overlap of individuals between measures: due to assets, health status, duration of low income, family break-up

11. Economising Total  2 Parents + Kids  1 Parent + Kids 65+ 65+ Maori Less/cheaper meats 23 28 52 36 62 Older clothes 10 11 30 12 30 Postponed doctor visit 8 9 18 8 21 No glasses 5 6 11 10 24 Not got prescription 2 3 7 2 10 Kids share bedroom - 8 17 - - Financial Problems Borrowed money 14 13 27 1 7 Can’t pay utilities 10 12 36 2 11 Relied on charity 5 6 21 0.5 6 Accommodation Problems Dampness 19 20 19 - - Plumbing 11 11 12 - - Roof 12 13 9 - -

12. 35 33 32 31 30 28 26 25 24 25 21 19 20 17 17 17 Population percentage 15 16 15 15 11 10 9 10 7 6 6 6 5 5 2 2 1 0 0 0 Sole-parentbeneficiaries Sole-parent market Two-parent beneficiaries Two-parent market incomes incomes Family type and income source

13. Concepts: Income Poverty1. Absolute or Relative • Issues: a) how to set initial threshold b) update threshold through time • Absolute – unable to achieve a minimum standard of living, but set relative to country - update by CPI (constant value) - poor fall behind (reset every 5/10 years?) • Relative: - maintain real value of threshold - update by median or average earnings. - using median in NZ gives ‘wrong’ results through time: poverty rises in booms, falls recessions

15. Comparison Constant Value and Relative Value Measures of Poverty, New Zealand, 1984-2007

16. 2. Setting the Threshold • Objective – set by ‘experts’, Arbitrary – 50% or 60% median income • Subjective – based on knowledge of the population [but ‘experts’ set parameters] • NZPMP: use of focus groups to negotiate a minimum adequate income level • But we set standard: adequate nutrition, able to afford doctor visit, one warm room: results now 20 years old • Budget accepted as realistic • = 60% median household equivalent disposable income

17. MAORI HOUSEHOLDS - 1993 • Minimum Adequate H’d Exp Fair Adeq Participation 2 Adults + 3C 1 Adult + 2C 2 Adults + 3C $ % $ % $ % • Food 100 21.0 70 18.7 150 23.7 • H’hold Op 10 2.1 10 2.7 25 3.9 • Housing 150 31.6 150 40.1 150 23.7 • Power 30 6.3 20 5.3 30 4.7 • Phone 11 2.4 11 3.0 11 1.6 • Transport 40 8.4 30 8.0 58 9.1 • Activities/Rec 15 3.2 10 2.7 38 6.0 • Insurance 12 2.4 12 3.1 13 2.1 • Life Insurance 20 4.2 15 4.0 20 3.2 • Exceptional 10 2.1 10 2.7 25 4.0 • Appliances 10 2.1 4 1.0 19 3.0 • Furniture 9 2.0 4 1.0 19 3.0 • Medical 15 3.2 5 1.3 15 2.3 • Clothing/Foot 38 7.9 20 5.3 48 7.6 • Education 6 1.2 4 1.1 12 1.8 • TOTAL 475 100.0 374 100.0 634 100.0

18. 3. Measures of Income Poverty • Incidence: proportion of population falling below threshold • Draws attention to issue • Also consider proportion of total poor in a category number of kids, work force status, ethnicity (Structure) • Severity or poverty gap: extent to which households fall below the poverty threshold. could use number below 50%, or poor both living standards and income poverty • Effectiveness of tax-benefit system in reducing market poverty • Working for Families - small impact on incidence, but greater impact on severity

19. 4. Adjusting for Household Size and Composition • Equivalence Scales: arbitrary • How much extra income does a household of 2 adults and 3 children require to achieve same standard of living as a couple • Economies of scale of living together • NZ – use Jensen scales = OECD • Couple = 1.00, Single = 0.60: i.e. requires 60% of income to achieve same standard of living; Sole parent 1 child = 0.92; couple 3 kids = 1.77

20. Other Issues in Poverty Measurement • Before and after housing costs BHC: resources available to household, AHC as housing costs independent of income • Data source: Household Economic Survey, but small sample, problem of those declaring losses, Allows analysis by household type, ethnic status, number of children, housing tenure, work-force status, age of ‘head’ of household • Ignores impact of GST, in-kind benefits • Primary and secondary poverty

21. 5. Poverty Dynamics • Comparative statics: trend through time (slide 11) • Persistence: length of time household is in poverty • One year (transient)may have little impact on outcomes • Some movement in/out of poverty: boundary hopping, or student into work, or retire. • Over 5 years, 65% remain bottom 20%, only 5% to top 40% income; • 71% remain in top 20%, 6% to bottom 40% income • But persistent, chronic and permanent • Data: !! SOFIE!!

22. Which trajectory? Bryan Perry, March 2012

23. Income Mobility: Carter, ImlachGunasekara

24. Number of waves in low income

25. Poverty persistence • Australia – HILDA survey, 2001 to 2008 • children aged under 12 in wave 1 (2001), 60% BHC … ~18% • UK – BHPS, 1991 to 2007 • children aged under 17 in first wave of the 4 • 60% BHC …. ~ 22% Bryan Perry, March 2012

26. Inter-generational transference: • Are children who grow up in poor families more likely to be poor themselves when adults? • Limited NZ data: Dunedin and Christchurch cohort studies have poor income data • Limited inter-generational mobility – about ½ children remain in same income bracket as parents • Less mobility for parents with low education, teenage parenting, unemployment -> poorer child performance

27. Deprivation Indicators • EU data, with NZ added (MSD) • 9 item EU index (not by choice: lack phone, colour TV, washing machine, car, meal with meat, week holiday, pay mortgage/rent/utilities, cover unexpected costs $NZ1500) • Enforced lack 3+ items • Child deprivation exceeds aged 65+ and for total population • NZ material hardship high for children, low for aged 65+ • New EU countries have high rates of deprivation

28. Deprivation Rates: % 3+ enforced lacks, using 9 item EU index Source: B. Perry, MSD

29. Poverty Incidence – Before/After Housing Costs (%)

30. Poverty before/after Housing Costs – tenure type