Three Decades of Consumption and Income Poverty

This paper examines the measurement of poverty in the United States from 1972 through 2004. We investigate how poverty rates and poverty gaps have changed over time, explore how these trends differ across demographic groups, and contrast these trends for several different income and consumption based measures of poverty. We also examine how sensitive different measures of poverty are to assumptions about equivalence scales, price adjustments, and the definition of the resource sharing unit. We document sharp differences, particularly in recent years, between different income based poverty measures, and between income and consumption based poverty rates and gaps. We find that sensible changes from the official price index and resource sharing unit tend to lead to substantial declines in measured income poverty rates, but our equivalence scale changes have only a small impact. We show moving from the official pre-tax money income measure to a disposable income measure that incorporates transfers and fringe benefits has a substantial effect on poverty rate changes over the past two decades. Furthermore, consumption based poverty rates often indicate large declines, even in recent years when income based poverty rates have risen. The patterns are very different across demographic groups, with aggregation hiding generally larger differences between income and consumption poverty rate changes, especially for the elderly. Income and consumption measures of deep poverty and poverty gaps have generally moved sharply in opposite directions in the last two decades with income deep poverty and poverty gaps rising, but consumption based deep poverty and poverty gaps falling. Although there are some practical limitations to an official, consumption based measure of poverty, we argue that consumption poverty is preferred for measuring changes in the well-being of the worst off.