The Problem with Income

Last week’s 20th anniversary of welfare reform event put income-based poverty measures on trial and drew skeptics from many circles. Michael Tanner stated that you would be hard-pressed to find “anyone on the left or right to defend the current [income-based] measure,” Robert Rector compared the current poverty measure to wearing glasses with cracked lenses, and Scott Winship presented research indicating income-based measurements distort U.S. poverty estimates.

Criticisms of the poverty metric during the event were only a microcosm of objections that have been occurring for some time.

Specifically, academics have taken issue with the failure of income-based poverty measures to accurately capture the realities of poverty. Measuring poverty incorrectly can have deleterious results, because it leads to misunderstanding the problem itself and, by extension, the solution.

So, what’s wrong with using income to measure poverty?

It turns out a lot, because income does not provide an accurate picture of economic well-being. It does not, for instance, provide information about an individual’s access to welfare benefits or access to formal or informal insurance. Income also can’t say anything about an individual’s accumulation of wealth or access to credit. Practically speaking, the income measurement often ignores dollars earned under-the-table on the so-called “gray market.” Importantly, for poor individuals, the resources that income overlooks are often substantially larger than income itself.

For a more concrete illustration of the issue, just imagine your average graduate student. This student likely has very low income. If he is lucky, perhaps he works part-time for a modest wage as a course assistant. As an older student, he may even have a wife who stays at home with a couple of young kids. Though he has substantial academic and personal financial obligations, his financial outlook is not as bleak as income alone indicates: he likely has considerable access to informal insurance (a phone-call to parents or in-laws will help in a pinch), access to credit (sizable student loans), and even a bit of savings remaining from a former professional life. Perhaps he qualifies for an academic scholarship or living stipend.

Even after considering this individual’s meager income and weighty family obligations, we would likely agree that he and his family have a bright future ahead. His day-to-day living situation suggests he knows that he does: he never worries about going hungry, there is no eminent danger of eviction, and his family generally lives life with many of the trimmings of a middle-class lifestyle.

Now consider your average high-school dropout, bereft of credentials or a resume replete with stable professional experience. She works part-time stocking inventory at an agricultural processing plant, but this work is seasonal and variable. At night she has part-time work cleaning office buildings across town. When she’s away from home she leaves her two young kids with a boyfriend who is out of work, but she constantly worries about losing her apartment and paying for groceries. 

For all of their differences, these two individuals have the same income levels, yet they have wildly disparate prospects and financial security. They even have the same size household, which means that they are subject to an identical federal poverty line – $24,300 for a family of four. As such, either may qualify for various income-tested welfare benefits.

Individuals in these two very different categories are treated exactly the same way by current poverty measures.

This example highlights just one of several issues associated with using income to measure poverty. Income has been used to measure poverty for decades because it is simple. However, in an increasingly complex world, it has become an increasingly meaningless measure. As we look to a future of more effective welfare policy, it is essential we improve on it.