How relative poverty statistics can be manipulated
27 November 2008
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I have written on this blog about some of the logical flaws associated with ‘relative poverty’, arguing that even if we were to accept the premise that poverty was a relative concept, it would still not be clear why the benchmark group should coincide with the inhabitants of the national territory.
To illustrate the problem, I have calculated a figure of relative poverty for a hypothetical re-united Austro-Hungary. I have taken income, measured in price-level-adjusted US dollars, from a recent OECD report. Unfortunately, the income distribution is only reported per decile instead of per percentile, so I have had to make the assumption that within each decile the distance between any two percentiles is the same. Nevertheless, there is enough information to provide a pretty good estimate.
Officially, poverty in Hungary (12.3%) is currently more than a full percentage point lower than in Austria (13.4%). But after re-unifying the former Habsburg Empire, the new median income earner either belongs to the second-poorest decile of Austria, or to the second-richest decile of Hungary (these strata overlap).
In Austria, only 14% earn less than the new median income, compared with 83% in Hungary. The relative poverty rate of Austro-Hungary is 26%. However, the poverty threshold, set at 60% of the median income, is lower than the average income of the lowest income decile in Austria. Under the assumption explained above, the poverty rate falls to just 3% in Austria but almost quadruples to 46% in Hungary.
In absolute terms, no individual has got richer or poorer. Yet a simple boundary change has apparently driven 3 million Hungarians into poverty. This demonstrates how easily relative poverty data can be manipulated. Clearly public policy should not be based on such flawed measures.
To illustrate the problem, I have calculated a figure of relative poverty for a hypothetical re-united Austro-Hungary. I have taken income, measured in price-level-adjusted US dollars, from a recent OECD report. Unfortunately, the income distribution is only reported per decile instead of per percentile, so I have had to make the assumption that within each decile the distance between any two percentiles is the same. Nevertheless, there is enough information to provide a pretty good estimate.
Officially, poverty in Hungary (12.3%) is currently more than a full percentage point lower than in Austria (13.4%). But after re-unifying the former Habsburg Empire, the new median income earner either belongs to the second-poorest decile of Austria, or to the second-richest decile of Hungary (these strata overlap).
In Austria, only 14% earn less than the new median income, compared with 83% in Hungary. The relative poverty rate of Austro-Hungary is 26%. However, the poverty threshold, set at 60% of the median income, is lower than the average income of the lowest income decile in Austria. Under the assumption explained above, the poverty rate falls to just 3% in Austria but almost quadruples to 46% in Hungary.
In absolute terms, no individual has got richer or poorer. Yet a simple boundary change has apparently driven 3 million Hungarians into poverty. This demonstrates how easily relative poverty data can be manipulated. Clearly public policy should not be based on such flawed measures.
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That is brilliant!
That is brilliant!
Kristian – send this post to Ross Clark on the Times. He was saying some really good things about poverty on the radio a couple of months ago. It is brilliant. If we had a united EU then some countries would have no poor at all. And, of course, if Sweden merged with the US, poverty would rocket in Sweden and fall in the US.
Kristian – send this post to Ross Clark on the Times. He was saying some really good things about poverty on the radio a couple of months ago. It is brilliant. If we had a united EU then some countries would have no poor at all. And, of course, if Sweden merged with the US, poverty would rocket in Sweden and fall in the US.
Actually, having mulled this over, for the price of plunging three million Hungarians into poverty, at least you would have lifted one million Austrians out of it.
Actually, having mulled this over, for the price of plunging three million Hungarians into poverty, at least you would have lifted one million Austrians out of it.
Dear Mark,
you’re right – still, Austro-Hungary has more poverty than AT and HU had individually, because it is a country with large income differences. So one could reduce poverty by doing the opposite of what I did – split countries instead of merging them. When we say “inequality is high in Italy”, we are at the same time comparing the waiter with the banker, and the North with the Mezzogiorno. If the data was easier available, I would already have reshaped the map of Europe completely.
Dear Mark,
you’re right – still, Austro-Hungary has more poverty than AT and HU had individually, because it is a country with large income differences. So one could reduce poverty by doing the opposite of what I did – split countries instead of merging them. When we say “inequality is high in Italy”, we are at the same time comparing the waiter with the banker, and the North with the Mezzogiorno. If the data was easier available, I would already have reshaped the map of Europe completely.
It would be interesting to do the same in reverse.
What would be the effect of granting Scotland and Wales full independence? Logically poverty in the rump state would decline.
Perhaps go a stage further and grant Liverpool full independence
It would be interesting to do the same in reverse.
What would be the effect of granting Scotland and Wales full independence? Logically poverty in the rump state would decline.
Perhaps go a stage further and grant Liverpool full independence