Measures of Material Hardship: Final Report. Limitations of Income-based Poverty Measures


Historically, poverty and well-being in the US have been assessed using income-based measures (i.e., by applying the official poverty thresholds to income data reported in surveys). In theory, income-based measures capture a household's ability to purchase the goods and services that it needs. That is, income is a measure of a household's resources that can be used to meet its needs, allowing for differences in individual tastes and preferences (income does not prejudge what expenditures households should make). Domestic income-based poverty measures also benefit from the fact that they draw upon nationally-representative surveys and administrative data systems that regularly collect income data. This allows for longitudinal comparisons of income trends over time.

However, using income as a proxy for total family resources or well-being may misrepresent what is actually available to a household for the purpose of meeting its basic needs. A family's living conditions are shaped by more than current income, and households may experience different living standards for reasons not explained by current income (e.g., Beverly, 1999; Edin & Lein, 1997; Mayer & Jencks, 1989, 1993; Rector et al., 1999).

Income-based measures usually only account for "current income" and do not account for wealth (e.g., savings or other liquid assets), debt, or access to credit that may be used to obtain goods and services. Goods also may be obtained without income, savings or credit - they may be acquired as gifts, exchanged via barter, received as free services or public goods from the government (Ringen, 1988). To the extent that families are able to meet their basic needs using accumulated wealth or credit or through other markets, measures based on current income will misrepresent families' ability to meet their basic needs.

Income's ability to provide a meaningful picture of household resources is further limited by the reliability of the data used to construct income-based measures. Survey respondents may be reluctant to reveal their income in surveys, fail to report or over-report income due to errors in survey design (e.g., this is particularly the case in households with irregular income sources or among individuals who engage in self-employment), and intentionally over- or -under-state their income (Roemer, 2000). For example, underreporting of welfare-related income and income derived from existing assets is a common concern with the Current Population Survey (CPS), which serves as the data source for calculating the US poverty statistics. In another example, Edin and Lein's (1997) ethnographic study shows that low-income single mothers meet their basic needs by obtaining income and support from "irregular sources" that are not easily captured by traditional economic poverty measures (e.g., off-the-books employment, and money from relatives, romantic partners, and fathers of their children).

The limitations of income-based measures are illustrated by the recent criticisms of the US poverty measure. This measure, originally developed in the 1960s, compares families' before tax cash income to poverty thresholds that were intended to identify families with income too low to purchase basic necessities (the original measure was based on families' food needs and the percentage of their budgets that were devoted to food) (Short, 2001). While the statistic's thresholds have been updated for inflation since that time, the Committee on National Statistics (Citro & Michael, 1995) and other researchers (e.g., Ruggles, 1990; Short, Shea, Johnson, & Garner, 1998) have criticized the official US poverty measure for not keeping pace with policy and other developments. Specifically, the measure:

  • Uses a definition of income that does not take into account government tax (i.e., EITC) and non-cash transfer (e.g., food stamps, WIC) policies that are targeted at helping low-income families;
  • Relies on self-reported income data from surveys;
  • Does not take into account geographic differences in cost of living (e.g., local variations in housing or shelter costs); and
  • Uses a threshold that has not been adequately updated to reflect changes in the minimal standard of need (e.g., cost of childcare) that have occurred since the measure's inception (Citro & Michael, 1995; Ruggles, 1990; Short, 2001).

The Committee on National Statistics has proposed guidelines for a new poverty measure that addresses some of these criticisms; however, to date, consensus on the specifics of a new measure has not been reached.

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