On the overlap of multidimensional and income poverty

1. 2006 Conference of the European Panel User Network (EPUNet) May 8-9, Barcelona - Spain On the overlap of multidimensional and income poverty Alessio Fusco IMPALLA – CEPS/INSTEAD alessio.fusco@ceps.lu

2. Indirect approaches Lack or resources Means to satisfy the needs Potential satisfaction of the needs Income approach of poverty is an indirect approach => unidimensional approach Direct approaches Failure to achieve basic functionings Ends or results Factual satisfaction of the needs Sen’s capability approach or Townsend’s relative deprivation => multidimensional approaches Direct vs indirect approaches (Sen, 1979; Ringen, 1987)

3. Direct vs income approach:which one to choose? • Theoretical point of view: direct approach more satisfying than income approach; • Main critique to the income/indirect approaches: • Social justice theory (see Sen’s work) • Not only lack of money but also « multifaceted combination of deprivations and unmet needs that prevent from participating in the society in the same way that others do. » • Income method is at most a second best (Sen, 1979)

4. Direct vs income approach:which one to choose? • However, multidimensional approaches face many difficulties in their operationalisation (choice of dimensions and elementary indicators, aggregation, etc.) • What is their practical utility/validity? • Important question as the measurement of multidimensional poverty implies a high cost in terms of time, resources and data (Klasen, 2000; Kuklys, 2005) => study of the overlap

5. Study of the overlap • Several methods to study the overlap: econometrics (Dekkers, 2003), correlation, or comparison of the population identified as poor by the two approaches(Lollivier and Verger, 1997; Layte etalii, 2001; Perry, 2002) • First Step: determine a threshold on each measure • Income approach: 60% of the median of the distribution of equivalent income • Multidimensional approaches: no consensus on where to place the threshold. • Common practices: • to use the same arbitrary proportion of poor on the two measures (Lollivier et Verger, 1997) • to set the deprivation threshold in order to obtain the same proportion of multidimensional and income poor (Layte et alii, 2001; Perry, 2002)

6. Aim of the paper • Main conclusion: mismatch between the income and the multidimensional approaches of poverty (Perry, 2002); non monetary indicators are related to monetary measures but not enough to consider them as equivalent • Drawback: the result is conditional to the thresholds chosen for each measure • Propose an extension of this method using an innovative methodology: the Receiver Operating Characteristics => assess of the overlap independently of the threshold on the multidimensional index

7. Receiver Operating Characteristic (ROC) • Graphic and non parametric way of portraying accuracy of a diagnosis test in a binary outcome for different cut points • Medical decision making: to detect presence/absence of a disease we need a diagnosis test Ti=0..Tmax • cut-off Z => presence/absence of the disease • For each Z=0..Tmax diagnosis error are likely to occur

8. Analogy with the concept of consistent poverty (Nolan and Whelan, 1996) • Income poverty: «disease» - binary outcome • Multidimensional index Si : «diagnosis test» • hyp: the income threshold of 60% of the median is a good threshold of poverty

9. ROC curve - France Z=0 TP= 1 TN=0 FP= 1 – TN =1 Z=Smax TP=0 TN=1 FP= 1 - TP =0 Figure 1: Curve of the Receiver Operating Characteristic for France Source:ECHP-UDB version December 2003, year 1995, author's computation

10. Area under the ROC Curve • Criterion of the quality of the overlap • Area = probability that the index of deprivation of an income poor chosen randomly be higher than the index of deprivation of a non income poor chosen randomly. • Area=1 => perfect overlap • Area=0,5 => no discriminating power • Area<0,5 => measures inversely correlated • Reference values:

11. Wave 2 - 1995 13 countries Unit of observation: individuals of more than 16 years old Match the income of wave 3 with household characteristics from wave 2 Income poverty threshold=60% of the median of the distribution of equivalent income Application to the ECHP

12. Multidimensional index:dimension and items • Several criteria to choose the items (frequency, social consensus, interrelation, Cronbach alpha) • 6 dimensions (q=1..6) and 26 items (j=1..26): A. Inability to afford most basic requirements B. Inability to meet payment schedules C. Absence of basic housing facilities D. Problems with accommodation E. Problems with environment F. Enforced lack of widely desired possessions

13. Table 4: List of items

15. Deprivation by dimension • All items are dichotomous: • xij = 1 deprivation on item j=1..26 • xij = 0 absence of disadvantage • Weighted index by dimension: with and is the proportion of people deprived on item j

16. Overall index of multidimensional poverty • Two axiomatic indexes Pe et Pα (Chakravarty et alii, 1998) where aq=1/q=1/6; xiq = 1 - Siq ;and e=0,5 and α=2 • Composite index

17. Table 8: Indexes of multidimensional poverty Source: ECHP-UDB version December 2003, computation from the author *weighted by the population of more than 16 years old of the different countries Multidimensional measure

18. Results – 60% of the median Table 9: Area under the ROC curve for a threshold of 60% of the median Source: ECHP-UDB version December 2003, computation from the author

20. Threshold of 50% and 70% Tableau 4.17: ROC à différents seuils Source: ECHP-UDB version décembre 2003, année 1995, calculs de l'auteur *pondération par la population de plus de 16 ans des différents pays

21. Conclusion • Aim of the paper was to introduce a new methodology to assess the overlap between income and multidimensional poverty • Results in line with the literature • Further evidence that the link between the two approaches exist… • … but is not strong enough to consider the two measures as equivalent (Dickes, 1989) • Complementary instead of substitutive • Possible extension: copula