The poverty threshold, or poverty line, is the minimum level of income deemed adequate in a particular country. In practice, like the definition of poverty, the official or common understanding of the poverty line is significantly higher in developed countries than in developing countries. The common international poverty line has in the past been roughly $1 a day. In 2008, the World Bank came out with a revised figure of $1.25 at 2005 purchasing-power parity (PPP).
Determining the poverty line is usually done by finding the total cost of all the essential resources that an average human adult consumes in one year. The largest of these expenses is typically the rent required to live in an apartment, so historically, economists have paid particular attention to the real estate market and housing prices as a strong poverty line affector. Individual factors are often used to account for various circumstances, such as whether one is a parent, elderly, a child, married, etc. The poverty threshold may be adjusted annually.
Charles Booth, a pioneering investigator of poverty in London at the turn of the 20th century, popularised the idea of a poverty line, a concept originally conceived by the London School Board. Booth set the line at 10 to 20 shillings per week, which he considered to be the minimum amount necessary for a family of 4 or 5 people to subsist. Benjamin Seebohm Rowntree (1871–1954), a British sociological researcher, social reformer and industrialist, surveyed rich families in York and drew a poverty line in terms of a minimum weekly sum of money "necessary to enable families ... to secure the necessaries of a healthy life", which included fuel and light, rent, food, clothing, and household and personal items. Based on data from leading nutritionists of the period he calculated the cheapest price for the minimum calorific intake and nutritional balance necessary before people got ill or lost weight. He considered this amount to set his poverty line and concluded that 27.84 percent of the total population of York lived below this poverty line. This result corresponded with that from Charles Booth's study of poverty in London and so challenged the view, commonly held at the time, that abject poverty was a problem particular to London and was not widespread in the rest of Britain. Rowntree distinguished between primary poverty, those who lacking in income and secondary poverty, those who had enough income but spent it elsewhere (1901:295-6).
Absolute poverty is the level of poverty as defined in terms of the minimal requirements necessary to afford minimal standards of food, clothing, health care and shelter. For the measure to be absolute, the line must be the same in different countries, cultures, and technological levels. Such an absolute measure should look only at the individual's power to consume and it should be independent of any changes in income distribution. The intuition behind an absolute measure is that mere survival takes essentially the same amount of resources across the world and that everybody should be subject to the same standards if meaningful comparisons of policies and progress are to be made. Notice that if everyone's real income in an economy increases, and the income distribution does not change, absolute poverty will decline.
Measuring poverty by an absolute threshold has the advantage of applying the same standard across different locations and time periods: it makes comparisons easier. On the other hand, it suffers from the disadvantage that any absolute poverty threshold is to some extent arbitrary; the amount of wealth required for survival is not the same in all places and time periods. For example, a person living in far northern Scandinavia requires a source of heat during colder months, while a person living on a tropical island does not.
This type of measure is often contrasted with measures of relative poverty (see below), which classify individuals or families as "poor" not by comparing them to a fixed cutoff point, but by comparing them to others in the population under study.
The term absolute poverty is also sometimes used as a synonym for extreme poverty. Absolute poverty is the absence of enough resources (such as money) to secure basic life necessities.
According to a UN declaration that resulted from the World Summit on Social Development in Copenhagen in 1995, absolute poverty is "a condition characterised by severe deprivation of basic human needs, including food, safe drinking water, sanitation facilities, health, shelter, education and information. It depends not only on income but also on access to services."
David Gordon's paper, "Indicators of Poverty & Hunger", for the United Nations, further defines absolute poverty as the absence of any two of the following eight basic needs:
For example, a person who lives in a home with a mud floor is considered severely deprived of shelter. A person who never attended school and cannot read is considered severely deprived of education. A person who has no newspaper, radio, television, or telephone is considered severely deprived of information. All people who meet any two of these conditions – for example, they live in homes with mud floors and cannot read – are considered to be living in absolute poverty.
The term "Absolute Poverty" is slightly misleading when defined in this manner, as there are great numbers of people who have none of these 8 basic needs met, but are still grouped with those who lack only 2.
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Relative poverty is the "most useful measure for ascertaining poverty rates in wealthy developed nations". Relative poverty measure is used by the United Nations Development Program (UNDP), the United Nations Children's Fund (UNICEF), the Organisation for Economic Co-operation and Development (OECD) and Canadian poverty researchers. In the European Union, the "relative poverty measure is the most prominent and most–quoted of the EU social inclusion indicators."
"Relative poverty reflects better the cost of social inclusion and equality of opportunity in a specific time and space."
"Once economic development has progressed beyond a certain minimum level, the rub of the poverty problem – from the point of view of both the poor individual and of the societies in which they live – is not so much the effects of poverty in any absolute form but the effects of the contrast, daily perceived, between the lives of the poor and the lives of those around them. For practical purposes, the problem of poverty in the industrialized nations today is a problem of relative poverty (page 9)."
In 1776, Adam Smith argued that poverty is the inability to afford "not only the commodities which are indispensably necessary for the support of life, but whatever the custom of the country renders it indecent for creditable people, even of the lowest order, to be without."
In 1964, in a joint committee economic President's report in the United States, Republicans endorsed the concept of relative poverty: "No objective definition of poverty exists.... The definition varies from place to place and time to time. In America as our standard of living rises, so does our idea of what is substandard."
In 1965 Rose Friedman argued for the use of relative poverty claiming that the definition of poverty changes with general living standards. Those labelled as poor in 1995, would have had "a higher standard of living than many labelled not poor" in 1965.
In 1979, British sociologist, Peter Townsend published his famous definition: "individuals... can be said to be in poverty when they lack the resources to obtain the types of diet, participate in the activities and have the living conditions and amenities which are customary, or are at least widely encouraged or approved, in the societies to which they belong (page 31)."
Brian Nolan and Christopher T. Whelan of the Economic and Social Research Institute (ESRI) in Ireland explained that "poverty has to be seen in terms of the standard of living of the society in question."
Relative poverty measures are used as official poverty rates by the European Union, UNICEF and the OEDC. The main poverty line used in the OECD and the European Union is based on "economic distance", a level of income set at 60% of the median household income.
A measure of relative poverty defines "poverty" as being below some relative poverty threshold. For example, the statement that "those individuals who are employed and whose household equivalised disposable income is below 60% of national median equivalised income are poor" uses a relative measure to define poverty. Using this definition, if everyone's real income in an economy increases, but the income distribution stays the same, then the rate of relative poverty will also stay the same.
Relative poverty measurements can sometimes produce odd results, especially in small populations. For example, if the median household in a wealthy neighborhood earns US$1 million each year, then a family that earns US$100,000 would be considered poor on the relative poverty scale, even though such a family could meet all of its basic needs and much more. At the other end of the scale, if the median household in a very poor neighborhood earned only 50% of what it needs to buy food, then a person who earned the median income would not be considered poor on a relative poverty scale, even though the person is clearly poor on an absolute poverty scale.
Measures of relative poverty are almost the same as measuring income inequality: If a society gets a more equal income distribution, relative poverty will fall. The theorem points out that if society changed in a way that hurt high earners more than low ones, then relative poverty would decrease, but every citizen of the society would be worse off. Likewise in the reverse direction: it is possible to reduce absolute poverty while increasing relative poverty.
The term relative poverty can also be used in a different sense to mean "moderate poverty" – for example, a standard of living or level of income that is high enough to satisfy basic needs (like water, food, clothing, housing, and basic health care), but still significantly lower than that of the majority of the population under consideration.
The basic needs approach is one of the major approaches to the measurement of absolute poverty in developing countries. It attempts to define the absolute minimum resources necessary for long-term physical well-being, usually in terms of consumption goods. The poverty line is then defined as the amount of income required to satisfy those needs. The 'basic needs' approach was introduced by the International Labour Organization's World Employment Conference in 1976. "Perhaps the high point of the WEP was the World Employment Conference of 1976, which proposed the satisfaction of basic human needs as the overriding objective of national and international development policy. The basic needs approach to development was endorsed by governments and workers' and employers' organizations from all over the world. It influenced the programmes and policies of major multilateral and bilateral development agencies, and was the precursor to the human development approach."
A traditional list of immediate "basic needs" is food (including water), shelter and clothing. Many modern lists emphasize the minimum level of consumption of 'basic needs' of not just food, water, and shelter, but also sanitation, education, and health care. Different agencies use different lists.
In 1978 Ghai investigated the literature that criticized the basic needs approach. Critics argued that the basic needs approach lacked scientific rigour; it was consumption-oriented and anti-growth. Some considered it to be "a recipe for perpetuating economic backwardness" and for giving the impression "that poverty elimination is all too easy". Amartya Sen focused on 'capabilities' rather than consumption.
Professor Chris Sarlo, an economist at Nipissing University in North Bay, Canada, and a senior fellow of the Fraser Institute, used Statistics Canada's socio-economic databases, particularly the Survey of Household Spending to determine the cost of a list of household necessities. The list includes food, shelter, clothing, health care, personal care, essential furnishings, transportation and communication, laundry, home insurance, and miscellaneous; it assumes that education is provided freely to all residents of Canada. This is calculated for various communities across Canada and adjusted for family size. With this information, he determines the proportion of Canadian households that have insufficient income to afford those necessities. Sarlo introduced his basic needs approach in 1992 in his book entitled Poverty in Canada published by the Fraser Institute. Sarlos argued that Statistics Canada's Low Income Cutoff (LICO), which uses a relative poverty line threshold was inadequate. Sarlos' basic needs poverty measure for Canada was updated in 2001 Sarlos' to reflect "new developments in the literature, external critiques of the approach, and better (and more comprehensive) data". For example it included out-of-pocket health-care costs. According to the Sarlo, "the basic-needs approach is partly absolute (the list [of necessities] is limited to items required for long-term physical well-being) and partly relative, reflecting the standards that apply in the individual's own society at the present time." It was updated again in 2006. The Fraser Institute's list of necessities for living creditably in Canada includes not only food, shelter, clothing, and health care, but also personal care, furniture, transportation, communication, laundry, and home insurance. It is criticized for not including any entertainment items like cable television, daily newspapers, and tickets to movies or sporting events. Based on his basic needs poverty threshold, the poverty rate in Canada has declined from about 12% of Canadian households to about 5% since the 1970s. This is in sharp contrast to Statistics Canada, the Conference Board of Canada, the Organisation for Economic Co-operation and Development (OECD) and UNESCO reports on poverty in Canada. They used the relative poverty measure considered most useful for advanced industrial nations like Canada, which Sarlo rejects.
According to a 2008 report by the Organisation for Economic Co-operation and Development (OECD), the rate of poverty in Canada, is among the highest of the OECD member nations, the world's wealthiest industrialized nations. There is no official government definition and therefore, measure, for poverty in Canada. However, Raphael Dennis, author of Poverty in Canada: Implications for Health and Quality of Life reported that the United Nations Development Program (UNDP), the United Nations Children's Fund (UNICEF), the Organisation for Economic Co-operation and Development (OECD) and Canadian poverty researchers[notes 1] find that relative poverty is the "most useful measure for ascertaining poverty rates in wealthy developed nations such as Canada".
National estimates are based on population-weighted subgroup estimates from household surveys. Definitions of the poverty line do vary considerably among nations. For example, rich nations generally employ more generous standards of poverty than poor nations. Even among rich nations, the standards differ greatly. Thus, the numbers are not comparable among countries. Even when nations do use the same method, some issues may remain.
In 2013, in the United States, the poverty threshold for a single person under 65 was at an annual income of US$11,490; the threshold for a family group of four, including two children, was US$23,550. According to the U.S. Census Bureau data released on September 13, 2011, the nation's poverty rate rose to 15.1 percent in 2010.
In the UK, "more than five million people – over a fifth (23 percent) of all employees – were paid less than £6.67 an hour in April 2006. This value is based on a low pay rate of 60 percent of full-time median earnings, equivalent to a little over £12,000 a year for a 35-hour working week. In April 2006, a 35-hour week would have earned someone £9,191 a year – before tax or National Insurance".
India's official poverty level, on the other hand, is split according to rural vs. urban thresholds. For urban dwellers, the poverty line is defined as living on less than 538.60 rupees (approximately US$12) per month, whereas for rural dwellers, it is defined as living on less than 356.35 rupees per month (approximately US$7.50).
Using a poverty threshold is problematic because having an income slightly above or below it is not substantially different; the negative effects of poverty tend to be continuous rather than discrete, and the same low income affects different people in different ways. To overcome this problem, a poverty index or indices can be used instead; see income inequality metrics.
A poverty threshold relies on a quantitative, or purely numbers-based, measure of income. If other human development-indicators like health and education are used, they must be quantified, which is not a simple (if even achievable) task.
Using a single monetary poverty threshold is simplistic and of questionable value when applied worldwide, as the cost of basic necessities varies dramatically from country to country. One may eat well for a set amount in one country, but the same amount of money, bartering or resources would be insufficient for averting starvation and, ultimately, death in another. The concept of a monetary poverty threshold is fundamentally flawed as economies vary widely and a basic needs approach is a better approximation of actual standard of living and true poverty than that of a monetary absolute.
Conservative critics point out that stated poverty lines in countries with substantial welfare systems (such as the United States and Europe) fail to count in-kind transfers, whether from public or private sources, when calculating a poverty threshold. For example, if a parent pays the rent on an apartment for an adult son directly to the apartment owner, instead of giving the money to the son to pay the rent, the money does not count as direct income to the son. If a church or non-profit organization gives food to an elderly person, the value of the food is not counted as direct income to the elderly person. Rea Hederman, a senior policy analyst in the Center for Data Analysis at the Heritage Foundation, said:
The official poverty measure counts only direct monetary income. It considers antipoverty programs such as food stamps, housing assistance, the Earned Income Tax Credit, Medicaid and school lunches, among others, "in-kind benefits" – and hence not income. So, despite everything these programs do to relieve poverty, they aren't counted as income when Washington measures the poverty rate.
Studies measuring the differences between income before and after taxes and government transfers, have found that without these programs, poverty would be roughly 30% to 40% higher than the official poverty line indicates, despite many of their benefits not being accounted for as income.[clarification needed]
Further, the U.S. Census Bureau calculates the poverty line the same throughout the U.S. regardless of the cost-of-living in a state or urban area. For instance, the cost-of-living in California, the most populous state, was 1.42 times the U.S. average in 2010 while the cost-of-living in Texas, the second most populous state, was 0.90 (90%) of the U.S. average.