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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