Relative Poverty

Relative poverty is a measure of poverty that defines the poor in relation to the living standards of the rest of the society, rather than in absolute terms. A person is relatively poor if their income falls below a threshold that is set relative to the median or the average income of the society.

Concept

Relative poverty is defined by comparison with the distribution of income in the society. The threshold is typically set at a proportion of the median income, often 50 or 60 percent.

The concept reflects the view that poverty is a matter of social exclusion as well as of material deprivation, and that the needs of individuals depend on the standards of the society in which they live.

Measurement

The measurement of relative poverty uses the distribution of income and a threshold that is set relative to the central tendency of the distribution. The measure is often expressed as the proportion of the population with income below the threshold.

The measures vary across countries, reflecting the differences in the thresholds and in the definitions of income. The comparison across countries must account for these differences.

The measurement of relative poverty is sensitive to the definition of income and to the treatment of taxes and transfers. The measure of income may be gross or net, and the coverage may include or exclude certain components.

Absolute and Relative Poverty

Absolute poverty defines the poor in relation to a fixed standard of living, typically the income required to meet basic needs. The standard is fixed in real terms, so that the measure changes only when the standard is updated.

The distinction matters for the analysis of poverty. Absolute poverty can be reduced by growth, since the income of the poor rises. Relative poverty may not fall with growth, since the threshold rises with the average income.

The two measures provide different perspectives, and both are used in the analysis of poverty and in the design of policy.

Policy

The policy response to relative poverty concerns the distribution of income and the provision of public services. The instruments include the tax and transfer system, which redistributes income, and the provision of services, including education and health care.

The design of the policy must address the causes of poverty, including the lack of access to education and to employment, and the barriers that prevent individuals from improving their circumstances. The policy must also address the intergenerational transmission of poverty.

The Measurement of the Poverty

The measurement of the poverty requires the choice of the indicator of the welfare, typically the income or the consumption, and the threshold that defines the poor.

The choice of the indicator affects the results, since the income and the consumption differ and the data on the consumption may be more reliable in the developing countries. The choice of the threshold affects the number of the poor, and the thresholds vary across the countries and the institutions.

The measurement must also account for the size and the composition of the households, since the needs depend on the number of the members. The equivalence scales adjust the income for the size of the household.

The Poverty and the Inequality

The poverty and the inequality are related but distinct. The poverty concerns the level of the income of the poorest, while the inequality concerns the distribution of the income across the whole population.

A reduction in the inequality may reduce the poverty, but the two do not necessarily move together. The growth may reduce the absolute poverty while the relative poverty remains unchanged or rises.

The analysis must consider the two dimensions, and the design of the policy must address both. The measures include the transfers to the poor, which reduce the absolute poverty, and the progressive taxation, which reduces the inequality.

The Policies to Reduce the Poverty

The policies to reduce the poverty include the transfers, the provision of the services, and the labor market policies.

The transfers include the cash transfers, which raise the income of the poor, and the in-kind transfers, which provide the goods and the services. The design of the transfers affects their effectiveness and their effect on the incentives.

The provision of the services, including the education and the health care, addresses the causes of the poverty and the intergenerational transmission. The labor market policies, including the training and the placement, improve the access to the employment.

Summary

Relative poverty defines the poor in relation to the living standards of the society, and it is measured using the thresholds set relative to the central tendency of the distribution. The analysis of the poverty and of the inequality informs the design of the policies to reduce the poverty.

See also

• Income Inequality
• Welfare Economics
• Economic Development