Why the poverty line is valid, and 265,000 children really are in poverty

One of the responses to the recent report on child poverty, showing that 265,000 New Zealand children live below the poverty line, is to say that the measurements are flawed.

This, from a blog on the Newstalk ZB site, is typical:

Poverty as defined in New Zealand are the households that make less than 60 per cent of the median disposable income.

So think about that. It means no matter how rich the country is and no matter how high the median household we will always have a class of people that are described as living in poverty.

This is, however, quite incorrect. Here’s a little thought experiment that shows why. Suppose the country was made up of five people: two earning $20,000 each, one on $50,000, one on $70,000 and one on $500,000. The average income would be the total of their incomes combined, $660,000, divided by five: $132,000.

But we’re not interested in that: we’re interested in the median, which is the amount earned by the middle person in this theoretical country. That’s $50,000.

What the poverty line says is that people are in poverty if they earn less than 60% of that $50,000: that is, less than $30,000. So both the people on $20,000 are in poverty.

Now, what happens if we lift both those people up to, say, $35,000, over the poverty line? If we were basing our measurements around the average, it is true that increasing those bottom incomes would lift the average, effectively raising the bar further. But remember that the median is the amount earned by the middle person. And that doesn’t change: it’s still $50,000. So both people would have been lifted out of poverty. That’s why the median, not the average, is used.

That leaves just one final point: why is the measurement 60% of the median? Well, it’s one of the internationally accepted definitions of poverty, and for good reason, because work from focus groups (including those in New Zealand) shows that it is below that level of income that families typically struggle to afford everything they need for a minimally decent life.

It’s worth remembering that in the real world (not our fictional example) the median income for a single person household (albeit this is a bit of a statistical construct) is only about $30,000. Which means that the poverty line for single person households is about $20,000 – and it doesn’t seem too much of a stretch to say that, if you’re living alone and earning less than $20,000, in New Zealand, you really are in poverty.

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7 comments on “Why the poverty line is valid, and 265,000 children really are in poverty
  1. But that’s just stupid.

    Accepting your figures, then the two people at 35k are now out of poverty.

    If nothing else happens, except that the one on 50k now earns 60k, they are back in poverty again – despite earning exactly the same as when they were ok – and being able to buy everything they were able to buy.

    These arbitrary ratios are a useful indication, but some account of absolute vs relative poverty still needs to be taken.

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  5. To john 8 months ago.

    If you look at the absolute facts, over 400,000 children live in single parent families. That is a fact in NZ. It is not a made up number.
    Now, if, on average, each single parent with children earns the absolute maximum they are able to, to not lose whatever benefit they may receive, then that in itself is a true indicator, an absolute indicator, as to the extent of poverty in New Zealand.

    May i suggest John, that you go to the appropriate website of the New Zealand Government and look at the absolute maximum a single parent is able to earn. All the facts and figures are there. Now. Also find what the average income in New Zealand actually is after Tax and Kiwisaver contributions. You will not be surprised to find that a single parent, and their child/ren are below that average income after their tax contributions by thousands of dollars.

    Those parents are below, not on or just above, but below the poverty line.

    How wrong is it then, that a 1st world country, with a relatively well educated population and decent standard of living, in comparison with other 1st world countries, seems to still have poverty present and the multinationals – Fonterra being a good example – are earning so much income and not showing any benefit in our country – i.e.: the people of this country. So much for the trickle down effect.

    How do you explain a $185,000 increase in annual salary for the head of Orion Energy in Christchurch – “Because he was very instrumental in getting CHRISTCHURCH back on the grid after the earthquake”. This was given as a bonus – and remember; its given annually. It was his job to do what he had to do. So what he did it well! That is why he was hired! That is totally outrageous that he would get that annual increase and people are still trying to find decent housing to live in in Christchurch and are trying to keep their fractured families in tact income wise. Totally immoral and totally wrong.

    Please inform yourself John by looking at those numbers on NZGOVT Sites. I think you will be very surprised, and maybe you may change what you think.

    • That was so uninformative. All you did was provide an example of how someone can be below the line, you’ve completely missed John’s point.
      It’s not about saying “go look at the website”, or “the rich are selfish”, but about properly defining and justifying the term “Poverty”. Also, Max is missing the point with that Newstalk ZB quote. It’s not about using Mean vs Median, but about using a percentage line to define poverty. Also, Max, the “Average” is not the same as the “Mean”. Mean is the word you’re looking for there, I learn that in year 7, I think.
      John’s question was “Why below 60% of median?”. I ask the same question. You could come up with convenient examples to support your view, but so can anyone; here are a few:
      Country X has 5 people with incomes:
      $7k, $7k, $10k, $100mil, $100mil.
      The median is 10k, 6k is the line, 0% of the population is living in poverty. But we can clearly see there is a huge problem with country X.
      (now one similar to John’s)
      Country Y has 5 people with incomes:
      $59.9k, $59.9k, $99k, $100k, $100k.
      $59.4k is the line, 0% of the population is in poverty.
      The $99k person is a chef, and thanks to their new recipe, they now earn $1k more.
      Suddenly, 40% of the population is in poverty

      The problem is, the below 60% rule is just a convenience tool. It doesn’t take anything like:
      The stage in someone’s life,
      Family structure (size & the question “Do you even look after kids who’re too young to work?”)
      Other financial supports (land, inheritance, parents),
      or people with low expenses (not living in the cities, growing their own food, etc.). It simply applies the numbers regardless of the situation.

      A much more accurate and reliable line would be created by asking the population: “Are you able to afford food for your young children?”.

      Also, next time, before you start hating on the rich, remember that not only do they pay much more tax already, but some of them come from poverty. If a single mother who earned $20k did everything she could and eventually became rich, are you going to blame her too?

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