May 1997

Comparing Poverty: The United States and Other Industrial Countries

The thirteenth seminar in AEI's Understanding Economic Inequality series examined international poverty comparisons. The discussion was led by McKinley Blackburn, associate professor of economics at the University of South Carolina. An edited summary of his presentation follows.

How does the rate of poverty in the United States compare with that in other countries? The answer depends on how poverty is measured. The simplest measure is relative poverty, the proportion of households or individuals with less than a given percentage of average income. But because average income levels differ across countries, the economic well-being of families deemed to be living in poverty will also be quite different from one country to another if one uses relative poverty as the point of comparison. A measure of absolute poverty is necessary to compare, from one country to another, the proportions of families with incomes insufficient to sustain a fixed minimum level of economic well-being. Levels of absolute poverty can be compared across different countries using purchasing power parity adjustments, conversion ratios that render the costs of goods and services priced in different currencies commensurable.

The United States has a high rate of relative poverty, which reflects a high degree of income inequality. But it has a low rate of absolute poverty, which reflects high average incomes. So, for example, there is a higher proportion of absolutely poor people--those subsisting below a minimum level of consumption--in France than in the United States. But France has a smaller proportion of poor people relative to average incomes than the United States, because average incomes in France are lower to begin with.

But the concept of relative poverty is problematic. The poverty line it establishes keeps rising over time as average incomes grow. Furthermore, relative poverty could be reduced by simply levying higher taxes on members of the middle class, who would lower their standard of living and therefore the relative poverty threshold. Fewer people would then be counted as poor in the country, even though the incomes of those below the middle class had not changed at all.

The Luxembourg Income Study (LIS) provides comparable income data across countries. Most early comparisons of poverty levels using the LIS data simply set the poverty line at a common percentage (usually 50 percent) of average income. This method, which measured relative poverty, suggested that the level of poverty in the United States was higher--sometimes much higher--than that observed in the advanced European economies and in Canada and Australia.

I have used data from the Luxembourg Income Study to compare poverty in eleven countries. It turns out that countries with a high level of absolute poverty tend to have a low level of relative poverty. The United States has the highest relative poverty of the eleven countries, regardless of the percentage of income used to set the poverty line. But the United States, along with Canada and Luxembourg, is in the group with the lowest level of absolute poverty. This reflects the fact that the average incomes and standards of living are higher in these three countries than in the others. So people who are relatively poor in the United States are better off--can afford more goods and services--than people in the same relative position in other countries.

Poverty measures and comparisons can be influenced by a number of factors that differ across countries, and I have analyzed those factors to find out if they affect the major conclusions about absolute and relative poverty. How does one allow for differences in family size, for example? Obviously a larger family needs more income than a smaller family, but a family of four does not necessarily need four times the income of a single person. Demographic factors also matter. For example, the proportion of families headed by single women is an important factor because such families tend to be poor in all countries. In addition, the choice of methods for comparing incomes that are measured in different currencies also affects the outcomes.

It is striking, however, that using different methods to adjust for these factors does not change the basic result. The United States remains a low poverty country in the absolute sense--even though it has twice as high a proportion of families headed by single women, for example, as the other countries. Canada and Luxembourg have slightly lower absolute poverty rates than the United States largely for that reason.

Is absolute poverty or relative poverty the better concept for international comparisons? Relative poverty is essentially a manifestation of the amount of income inequality. Absolute poverty reflects the level of economic well-being families can enjoy based on the purchasing power of their incomes. By this latter test, the United States fares well in comparison with other advanced countries.