15.1 Drawing the Poverty Line

Measuring Poverty and the Poverty Line

Poverty Measurement

The poverty line is a specific dollar amount representing the minimum income needed to maintain a basic standard of living. If your income falls below it, you're officially counted as living in poverty.

A few key features of the poverty line:

• It varies by family size and composition. A family of four has a higher threshold than a single individual.
• It's adjusted annually for inflation using the Consumer Price Index (CPI), so the dollar amount rises as the cost of living increases.
• The official U.S. measure uses pre-tax cash income only. That means it excludes non-cash benefits like food stamps (SNAP) and Medicaid.

The poverty threshold was developed in the 1960s by Mollie Orshansky at the Social Security Administration. Her method was straightforward:

1. Calculate the cost of a minimum adequate food diet for a given family size.
2. Multiply that cost by three, based on the assumption that food made up roughly one-third of a typical family's budget (drawn from a 1955 Household Food Consumption Survey).

That multiplier-of-three formula, with inflation adjustments, is still the basis of the official poverty line today.

U.S. Poverty Trends

Overall poverty rates rise and fall with the economy. They climbed during the 2008 financial crisis and declined during periods of sustained growth like the late 1990s.

Poverty rates also vary significantly across demographic groups. Some 2019 figures illustrate this:

• By age: Children under 18 had a poverty rate of 17.5%, compared to 11.1% for working-age adults. Kids are more likely to live in poverty because they depend entirely on their household's earnings.
• By race and ethnicity: African Americans (18.8%) and Hispanics (15.7%) experienced notably higher rates than non-Hispanic whites (7.3%) and Asians (7.3%).
• By family structure: Female-headed single-parent households had a poverty rate of 22.2%, compared to just 4.7% for married-couple families. Two earners in a household make a big difference.
• By geography: Poverty concentrates in rural areas like Appalachia and in certain urban neighborhoods, where job opportunities tend to be scarcer.

Broader economic forces like job losses, wage stagnation, and rising income inequality all push poverty rates higher over time.

Poverty Measurement Critiques

The official poverty measure has several well-known limitations:

• No geographic adjustment. The same poverty threshold applies whether you live in New York City or rural Mississippi, even though housing and other costs differ dramatically between regions.
• Excludes non-cash benefits. Programs like SNAP, housing subsidies, and Medicaid can significantly improve a family's actual standard of living, but none of that shows up in the official calculation.
• Outdated spending assumptions. The formula still relies on the 1960s assumption that food is one-third of a family's budget. Today, housing and healthcare consume a much larger share of spending for most families.
• No measure of depth. The poverty line only tells you whether someone is above or below the threshold. A family earning $1,000$ below the line and one earning $10,000$ below it are both simply counted as "in poverty."
• Potentially too low. Some economists argue the threshold doesn't capture the true extent of economic hardship, since many families above the line still struggle to cover basic needs.

To address these shortcomings, the Census Bureau developed the Supplemental Poverty Measure (SPM). The SPM improves on the official measure in several ways:

• It accounts for geographic differences in housing costs.
• It includes the value of non-cash benefits like SNAP and housing subsidies.
• It subtracts necessary expenses such as taxes, work-related costs (commuting, childcare), and out-of-pocket medical spending.

The SPM doesn't replace the official poverty rate, but it gives a more complete picture of who is actually struggling financially. For your exam, be ready to explain both measures and articulate why the official measure can either overcount or undercount poverty depending on the situation.