Income threshold approach

Many poverty measurements use household income, adjusted for household size, to find out who is in poverty. A level is set and those who fall below this are seen as 'in poverty' and those above it are not.

The UK government, the European Union and many other countries use 60 per cent of median household income as the poverty 'threshold'. The 60 per cent level is chosen as an indicator of the income at which those below are likely to be suffering hardship. As such, it is a proxy measure of poverty and, without validation from direct measures of people's living standards, is essentially arbitrary. The threshold's importance is that it does show how the poorest members of society are doing in relation to others, it can be tracked over time, and allows comparisons between different countries.

Median threshold

The income point taken to set the threshold is generally based on median income – that is the middle point in the income range with equal numbers of households on incomes above and below that point. Taking a percentage of median income as the threshold means that giving money to those on the lowest incomes will not in itself raise the threshold; this makes it easier, in principle, to lift households above the 60 per cent threshold.

Mean threshold

You could take an income threshold related to mean (or average) income – that is the sum of all incomes divided by the number of incomes. Raising the incomes of those at the bottom would then raise the mean point and thereby raise the threshold, making it more difficult to lift people above the threshold. In the past, 50 per cent of mean income has been used as a poverty threshold.

Impact on poverty

The interactive graph below shows what happens when percentages of median and mean income are used to measure poverty.

The graph's starting point shows the distribution of household income in the UK in 2009 and it marks both a poverty threshold based on 60 per cent of median income and one based on 60 per cent of mean income. The household income of each decile from the bottom tenth of households to the top tenth of households is marked by 'people' on the graph, one for each decile. You can move the 'people' along the income range to explore which people have an impact on where the threshold falls for both median and mean incomes. You can also explore how much additional income would be needed by those below the thresholds to raise themselves above those levels. You can return to the start point by pressing the 'See actual' button.

You will see that raising the incomes of the deciles below the income threshold does not alter the position of the 60 per cent median threshold until these people have more income than those in the middle. However, raising the incomes of those at the bottom will raise the position of the 60 per cent mean threshold, moving it further upwards along the range as you move the people along.

You will also see that increasing the incomes of those in the higher income groups has no effect on the median threshold but it will raise the mean threshold. Using a percentage of the median as the poverty threshold means that the rich can get richer and richer without having any impact on poverty measurement.

The only way to raise, or lower, the median threshold is to change the incomes of the people in the middle. As there is an even number of people on this graph you can see this by moving the fifth and sixth person along the range. As you move these people up or down, the median income threshold changes and those on lower incomes will move in and out of 'poverty' without any changes to their own income. So, in a recession, the numbers 'in poverty' (based on the numbers below a 60 per cent median threshold) may drop not because the income of those at the bottom has risen but because the income of the median point has dropped.

Whichever threshold is used, you will see that you can raise all the people at the bottom of the range above either threshold.

To raise everyone above the 60 per cent median income threshold, what's important is the spread of income in the bottom half. To raise everyone above the 60 per cent mean income threshold, what's important is the spread of income across the whole range. The 60 per cent median measure is, in essence, a measure of the distribution and spread of income in the bottom half of the income range while the 60 per cent of mean income is a measure across the whole income range.

Equivalence scale

When using income to measure poverty, other decisions have to be made on whose income is being compared, what you count as income and how you compare between different people in different circumstances.

Poverty measures use net income – that is, total income minus direct taxes (income tax, national insurance and council tax) and plus the value of any social security benefits received. This is the income that people have available to buy goods and services. Most poverty measures then take household income rather than individual income and adjust the total net disposable income to reflect household composition and size - to make each income 'equivalent'. This is called net household equivalised income.

Official government statistics use what's known as the 'modified OECD' (Organisation for Economic Co-operation and Development) equivalence scale, in which an adult couple with no dependent children is taken as the benchmark with the equivalence scale of one. The equivalence of different types of household can be calculated by adding together the weight of the various household members as shown below.

Modified OECD Equivalence Scale

To find out where any individual lies on the income distribution scale, you need to make a number of calculations based on the type of household they live in and the household income. If you are interested in where you lie, the Institute of Fiscal Studies provides a quick and easy calculator to do this.

Clearly, which equivalence scale is used and, in particular, what percentage is given to children in the scale, can make a difference to how different types of household appear to fare. Many have argued that the current scales give insufficient weight to the costs of bringing up children and thereby produce lower estimates of poverty than a scale that more accurately reflects the costs of bringing up children.

More on this debate on equivalence scales can be found on pages 49 to 51 of 'The concept and measurement of poverty' in Poverty and Social Exclusion in Britain and in Chapter 5 of Bare Necessities: Poverty and Social Exclusion in Northern Ireland.

Limitations

These income-based measures provide important information on the extent to which government targets are being met. But they have many limitations. They are only an indirect indicator of poverty; they do not measure need and deprivation. They do not take into account financial resources other than income, or other financial deductions such as debt. And they don't take into account non-income-based resources, such as the level of service provision.

In particular, taking a threshold as simply a percentage of median or mean income is essentially arbitrary. It is possible to set an income threshold based on the level of income required to meet certain levels of need - but this first requires an examination of people's living standards to establish what needs should be met and who falls below this standard. To do this, other ways of thinking about and measuring poverty need to be developed.

The consensual method for measuring poverty has developed a way of calculating a poverty threshold that combines both low living standards and low income. The Minimum Income Standards approach has developed ways to calculate the minimum budget needed for a minimum acceptable standard of living.

Poverty trends

Data on the extent of poverty in the UK using various income threshold measures can be found on the Joseph Rowntree poverty site.

References

Gordon, D. (2006) 'The concept and measurement of poverty' in Poverty and Social Exclusion in Britain, Bristol, The Policy Press.

Hillyard P., Kelly, G., McLaughlin, E., Patsios, D. and Tomlinson, M. (2003) Bare Necessities: Poverty and Social Exclusion in Northern Ireland, Belfast, Democratic Dialogue.

PSE 2011 is a major collaboration between the University of Bristol, Heriot-Watt University, The Open University, Queen's University Belfast, University of Glasgow and the University of York working with the National Centre for Social Research and the Northern Ireland Statistics and Research Agency.