American vs. European Poverty Measures

Blog, Poverty, Ben Eisen

Interesting post at the Freakonomics blog about the differences between American and European poverty measurements. The United States typically uses absolute measures of poverty, European countries mostly use relative measures.

In most European countries, the “poverty line” is set at 50 percent of the median income. Thinking through the implications of this type of statistic, it becomes clear that relative poverty lines are actually only measurements of inequality, and tell us almost nothing about material deprivation.

Think about these hypotheticals situations. If something bad happened in a European economy and the richest 50 percent of the population saw their incomes drop considerably, but incomes for people in the bottom half stayed the same, a relative poverty measure would suggest  that the poverty rate had dropped considerably. The poverty benchmark – half of the median income, would be lower because the median income would have dropped. Fewer people would fall below this lower line and European statistics would therefore lead us to conclude that there was less “poverty” even though nobody would actually be any better off.

On the other hand, if everybody’s income magically doubled (with prices for goods and services somehow remaining the same) this wonderful development would have no impact on poverty rates at all. Even though far fewer folks would be in a situation of actual financial hardship and everybody could buy more stuff, the relative approach to measurement would suggest that poverty had not been reduced.

This doesn’t mean that relative measures of poverty are useless or unimportant – it just means that they measure inequality as opposed to the number of people living in a state of material deprivation. If you want to know whether income levels are growing more unequal, by all means, take a look at relative poverty measures. If you want to know whether more or fewer people are having trouble buying the neccessities of life this year as opposed to last year, you’ll need to look at an absolute measure of poverty.