Poverty Measure

The origins of the Poverty measure
While studying the impact of minimum wage increases on poverty, it is of significant importance to understand how poverty is measured. According to the definition of poverty –
“The U.S. Census Bureau determines poverty status by comparing pre-tax cash income against a threshold that is set at three times the cost of a minimum food diet in 1963, updated annually for inflation using the Consumer Price Index (CPI; see the last section of this FAQ for an explanation of the CPI), and adjusted for family size, composition, and age of householder. "Family" is defined by the official poverty measure as persons living together who are related by birth, marriage, or adoption. Thresholds do not vary geographically.”

They decided to not index it to the cost of food or the share of income a family spends on food.
The method of defining the line of poverty has not changed much and all of the considerations above to first come up with the measure of poverty line and the subsequent indexing methods have a significant importance to how poverty is measured today.

The limitations of the poverty line
There have been many criticisms about the way poverty line is defined and how it has been indexed. The main criticisms about the poverty line are below –
• The “headcount” approach defines only the share of people who fall below the poverty line but it does not measure by how much they are falling below. In this approach, a person earning 50% of the poverty line is same as another whose income is at 90% of the poverty line. This is commonly referred to as “depth of economic need”.
• It excludes relevant expenses such as taxes, work expense, out-of-pocket medical expense and benefits in the form of government assistance such as food assistance.
• It does not vary within the United States to reflect differences in cost of

• The definition of persons considered to be a “family” does not take into account cohabitors, unmarried partnrs with children from previous relationships and foster children.
In 1992, the National Academy of Sciences (NAS) study panel, was established at the request of Congress to conduct a comprehensive examination of poverty measurement in the United States. Their charge was to evaluate the official poverty measure to see if it was still serving its intended purposes and whether the panel of experts thought it could be improved.
The panel recommended the following:
“The official U.S. poverty thresholds should comprise a budget for the three basic categories of food, clothing, shelter (including utilities), and a small additional amount to allow for other needs (e.g., household supplies). Actual expenditure data should be used to develop a threshold for a reference family of four—two adults and two children. Each year, that threshold should be updated to reflect changes in spending on food, clothing, and shelter over the previous 3 years and then adjusted for different family types and geographic areas of the country. The resources of a family or individual that are compared with the appropriate threshold to determine poverty status should be consistently defined to include money and near-money disposable income; that is, resources should include most in-kind benefits and exclude taxes and certain other