Relative Poverty Rates can Mislead

Many researchers and policy makers favor a “relative” measure of poverty. That’s because our notion of what constitutes a minimally acceptable standard of living tends to be shaped by what’s typical in our own society. This approach dates back at least to Adam Smith. Its contemporary popularity owes much to Peter Townsend and Amartya Sen, and to the fact that the European Union’s official poverty measure is a relative one.

A relative poverty measure is essentially a measure of inequality within the bottom half of the income distribution. As long as this is made clear, such a measure can serve a purpose. But it’s fairly common for commentators to refer to a relative poverty rate as though it’s an indicator of absolute well-being. A journalist or opinion writer or researcher may say something like “We’ve failed to make things better for the poor; the poverty rate is the same now as a decade ago.” When hearing this, some (many?) of us will assume it reflects stagnant incomes for households at the bottom. But low-end incomes may actually have increased; that can happen without yielding any reduction in the relative poverty rate if incomes in the middle rise too.

Consider the experiences of six rich nations from the late 1970s to the mid-2000s. The following charts show trends in relative poverty and in absolute inflation-adjusted household income at the tenth percentile (a good proxy for “the poor”) in three of the six: the United States, Canada, and Germany. In each of these three countries the relative poverty rate increased slightly over the period. And in each of them absolute incomes of low-end households were flat or increased only minimally. Relative poverty rates and absolute incomes tell a consistent tale.

The story is quite different in Sweden, Norway, and Ireland. Here too relative poverty rates were flat or slightly rising. But in these three countries the absolute incomes of low-end households increased by a substantial amount. The reason the relative poverty rate in these countries didn’t fall is that household incomes at the median increased just as rapidly.

Relative poverty is of some interest, to be sure. But to avoid confusion, we might do well to sometimes refer to it as “lower-half inequality.”

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