Income, consumption, and poverty measurement in the Philippines

The official poverty methodology of the Philippines uses pretax income as a measure of household welfare. A household is deemed poor if its pretax income falls below a minimum income sufficient to buy the household’s basic needs. However, several studies suggest that a more appropriate welfare measure for poverty estimation is one that includes only resources available for a household’s own consumption of goods and services. This means taxes, social security expenditures, and gifts or expenses for other households must be excluded from the welfare aggregate. Additionally, arguments towards using consumption as a better measure of welfare in poverty estimation also persist. In this study, we explore two welfare aggregates, disposable income, and basic consumption, and assess how well these alternative measures identify the disadvantaged households compared to when pretax income is used. Using the 2018 Family Income and Expenditure Survey, our results show that while disposable income is no better than pretax income in identifying deprived households, a consumption-based measure is preferable to an income-based measure in identifying the disadvantaged. Results are robust even when the welfare measures are adjusted to account for economies of scale in the household.