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Choosing and Estimating Poverty Indicators

How to measure poverty:

Define welfare measures

Choose and estimate a poverty indicator

The poverty measure itself is a statistical function which translates the comparison of the indicator of well being and the poverty line which is made for each household into one aggregate number for the population as a whole or a population sub-group. Many alternative measures exist but the following three measures are most commonly used:

  • Incidence of poverty (headcount index): This is the share of the population whose income or consumption is below the poverty line, that is, the share of the population that cannot afford to buy a basic basket of goods. An analyst using several poverty lines, say one for poverty and one for extreme poverty, can estimate the incidence of both poverty and extreme poverty. For non monetary indicators, similarly, the incidence of poverty measures the share of the population which does not reach the defined threshold (e.g. percentage of the population with less than 3 years of education).
  • Depth of poverty (poverty gap): This provides information regarding how far off households are from the poverty line. This measure captures the mean aggregate income or consumption shortfall relative to the poverty line across the whole population. It is obtained by adding up all the shortfalls of the poor (considering the non-poor has having a shortfall of zero) and dividing the total by the population. Put differently, it gives the total resources needed to bring all the poor to the level of the poverty line (divided by the number of individuals in the population). This measure can also be used for non-monetary indicators, provided that the measure of the distance is meaningful. The poverty gap in education could be the ‘number of years of education missing to reach the defined threshold’. In some cases, though, the measure does not make sense or is not quantifiable (e.g. when indicators are binary, such as literacy, in which case only the concept of the headcount can be used). Note also that, the poverty gap can be used as a measure of the ‘minimum amount of resources necessary to eradicate poverty’, that is, the amount that one would have to transfer to the poor under perfect targeting (i.e. each poor getting exactly the amount he/she needs to be lifted out of poverty) to bring them all out of poverty.
  • Poverty severity (squared poverty gap): This takes into account not only the distance separating the poor from the poverty line (the poverty gap), but also the inequality among the poor. That is, a higher weight is placed on those households who are further away from the poverty line. As for the poverty gap measure, limitations apply to some non-monetary indicators.

For the formulae used to derive these poverty measures, see Technical Note: Measuring Poverty and Analyzing Changes in Poverty Over Time.

All of these measures can be calculated on a household basis, i.e. by assessing the share of households who are below the poverty line in the case of the headcount index. However, it might be better to estimate the measures on a population basis – in terms of individuals – in order to take into account the number of individuals within each household.

The measures of depth and severity of poverty are important complements of the incidence of poverty. It might be the case that some groups have a high poverty incidence but low poverty gap (when numerous members are just below the poverty line), while other groups have a low poverty incidence but a high poverty gap for those who are poor (when relatively few members are below the poverty line, but with extremely low levels of consumption or income). The table below provides an example from Madagascar. According to the headcount, unskilled workers show the third highest poverty rate, while the group is in the fifth rank according to the poverty severity. Comparing them with the herders shows that they have a higher risk of being in poverty, but that their poverty tends to be less severe or deep. The types of interventions needed to help the two groups are therefore likely to be different.

Poverty Groups by Socio-economic Groups, Madagascar 1994

Depth and severity might be particularly important for the evaluation of programs and policies. A program might be very effective at reducing the number of poor (the incidence of poverty) but might do so only by lifting those who were those closest to the poverty line out of poverty (low impact on the poverty gap). Other interventions might better address the situation of the very poor but have a low impact on the overall incidence (if it brings the very poor closer to the poverty line but not above it).

For more information, please consult:

Back to Measuring Poverty

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