Transition Events in the Dynamics of Poverty. IV.1. Count Method

09/01/2002

The count method is used to examine both the absolute number of individuals entering and exiting poverty, as well as the probability of entering and exiting poverty at a point in time. The number of people entering and exiting poverty is obtained by calculating changes in individuals’ poverty statuses across two years. The number of people who enter poverty in year t is defined as the number of persons not poor last year, at t-1, who are poor this year, at t. Similarly, the number of people who exit poverty in year t is defined as the number of persons poor last year, at t-1, who are not poor this year, at t. For our notation, let ENt represent the number of individuals who enter poverty in year t and EXt represent the number of persons who exit poverty in year t. Equation 1 (presented in the previous section) shows that these are two of the components needed to decompose the poverty rate.

Looking at entries and exits in the context of the poverty rate equation (Equation 1) provides answers to one of the primary questions: What are the dynamics behind changes in the poverty rate over time? This descriptive analysis provides information about the relative importance of poverty entries and poverty exits in defining the overall poverty rate. For example, we can examine whether poverty rates remained high in some years because the number of entries and exits were low or because both entries and exits were high. A simple table, like the one shown below, is used to identify whether there are any patterns in poverty entry and/or poverty exits between the mid-1970s and mid-1990s.

 

Year Number Poor Number Enter Poverty Number Exit Poverty Net Change in Number Poor Population Poverty Rate
1974 NP,74          
1975 NP,75 EN75 EX75 EN75 – EX75 N75
1976 NP,76 EN76 EX76 EN76 – EX76 N76
1977 NP,77 EN77 EX77 EN77 – EX77 N77
1978 NP,78 EN78 EX78 EN78 – EX78 N78

The number of entries and exits are used to calculate the probability of entering or exiting poverty at a point in time. The probability of entering poverty is defined as the ratio of the number of people who enter poverty in year t (ENt) and the number of people not poor in year t-1 (Nnp,t-1), or

  [2]

Similarly, the probability of exiting poverty is defined as the ratio of the number of people who exit poverty in year t (EXt) and the number of people poor in year t-1 (Np,t-1), or

  [3]

Note that the sum of Nnp,t-1 and Np,t-1 is the total population in year t-1.

The definitions above highlight, for example, that for an individual to enter poverty in year t, that individual cannot be poor in year t-1. While this appears obvious, it is very important to keep in mind when examining poverty entry and exit rates. The percentage of individuals entering poverty is calculated from the population of individuals not poor, which is the majority of the U.S. population, while the percentage of individuals exiting poverty is calculated from the population of individuals who are poor, which is small fraction of the U.S. population. So, even if the same number of individuals enter and exit poverty in a year, the poverty entry rate will be substantially lower than the poverty exit rate. Eller (1996), for example, finds a 3.0 percent poverty entry rate in 1993 and a 21.6 poverty exit rate in 1993. These percentages provide no information about whether more people entered or exited poverty in 1993. The absolute numbers of entries and exits, defined as ENt and EXt above, do provide this information.

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