Poverty Line in Canada

Almost one out of eight individuals in Canada are living in poverty. What is even more problematic is that the poverty rate is disproportionately higher amongst under-served populations such as indigenous peoples, women, racialized communities, and people living with disabilities. Those who are poor face food insecurity, poorer health outcomes and access to health care, and homelessness. In addition, poverty costs Canada billions of dollars each year (estimated to be $72-84 billion/year)

Canada recently announced its first poverty reduction strategy called, Opportunity for All. The strategy includes creating an official poverty line, setting targets such as reducing poverty by 20% by 2020 and measuring and tracking the progress by regularly updating the poverty line, addressing data gaps, and tracking progress. The strategy also suggests to legislate the vision and targets and make Canada’s poverty line the official measure of poverty in Canada.  Canada’s Official Poverty Line is based on the cost of a basket of goods and services that a typical family of four need in order to meet their basic needs and achieve a modest standard of living in communities across Canada. This basket of goods consists of clothing and footwear, transportation, nutritious food, shelter and other necessary goods and services. The cost of such a basket has been calculated for 50 communities across Canada and as such, 50 different poverty lines have been established. A households’ disposable income (income remaining after removing taxes) is then compared to the cost of the basket in their respective community to determine whether they fall under the poverty line.

Having a poverty line will enable governments to set targets, the public to hold the government accountable on working towards reducing poverty and create a common language that all persons working in the field can use. As such, the federal liberal government can be commended in acting to address poverty and inequality. That being said, challenges remain in addressing poverty and inequality in Canada. Without addressing these, Canada’s poverty reduction strategy will become limited in its ability to create change.

Challenges to measuring poverty and inequality in Canada:

  1. Existing data and data sources to measure poverty are limited: The Canadian government plans to use the Canadian Income Survey to determine a household’s disposable income. One of the limitations of using this survey is the time lag in retrieving income data. With a time-lag, the poverty line will only be reflective of the past rather than the present. Another limitation is the moderate sample size of the survey as the survey is only administered to 27,119 households and 63,197 individuals. That is not a huge sample given that there is always some uncertainty with surveys. Another issue is that territories and indigenous populations at present are not captured by the survey (Corak, 2018).
  2. Consumption may be a better measure of poverty: Choosing disposable income as an indicator of poverty can also be challenged when you consider consumption patterns. Given that people make consumption decisions with knowledge about their future and past incomes in addition to their present income (income focuses solely on the latter), consumption patterns may be a better indicator of poverty. It is also a better method to use when you are interested in poor outcomes, rather than poor access. In addition, it has been shown that income poverty measures are about one-third lower than consumption poverty measures in each year (Pendakur, 2001). As such, what poverty measure one uses influence the outcomes one sees.
  3. Focusing on income ignores other relevant information: Another problem in Canada’s decision to measure poverty by comparing a household’s disposable income to a cost of basket of goods is that it focuses solely at income. This method ignores property, in-kind assistance, sharing of resources across households and generations, informal exchanges and non-declared income (Kerr, 2001). Also, having equivalence scales in terms of income imply that welfare is only in terms of material and economic welfare and not about the happiness they get from it.
  4. Poverty can be defined in many ways: How poverty is defined influences how it is measured and as such, the trends one sees and their policy implications (Corak, 2016). Broadly, there are two poverty definitions. Absolute poverty measures poverty in relation to the amount of money necessary to meet basic needs such as food, clothing, and shelter. A consequence of focusing on absolute poverty in Canada, is that it understates the poverty line as it shows that over time, the number of people who are of low-income has decreased as a result of median incomes increasing. Absolute poverty measures also do not look at the differences amongst people who fall below the poverty line even though it is known that negative effects of low income are continuous rather than discrete (Corak, 2016). In other words, it does not consider the depth of poverty. Also, those who are just above the poverty line may also be worse-off in terms of well-being similar to those just below the poverty line. Focusing on absolute poverty would miss this. Relative poverty, on the other hand, is poverty in relation to economic status of other members of society and is a measure of income inequality. As such, it is a better measure of poverty in developed countries such as Canada. Canada’s poverty line measurement is primarily a measure of absolute poverty as it uses a cost of a basket of goods to determine poverty level. That being said, by including “other necessary goods and services” in the basket of goods, a relative component is added to the measurement of poverty. However, it is clear that for the most part, the official poverty line is a measure of absolute poverty, making it limited.
  5. Methods used to calculate poverty line do not consider heterogeneity in Canadian households: Although household size and geographic variation are considered (by using an equivalence scale that is equivalent to the square root of household size and creating 50 poverty lines for 50 communities across the country respectively), the methods do not consider composition of families and how that may influence the poverty line measurements. For instance, poverty and income affect households differently depending on ethnicity, duration in Canada, and the number of people who are working in the household, how many hours they work and their wage rate. In the last decade, there has also been an increase in the number of hours that both partners work resulting in lower fertility rates and parents having children at an older age. There has also been an increase in the number of divorced families, childless-families and number of one-person households (Government of Canada, 2018). Also, it assumes that within a family, welfare levels are equalized across members. However, needs of parents may differ than needs of children which may not be captured. Lastly, it is not clear whether or not the consumption patterns of the reference group are appropriate for older people. This all goes to say that the composition of the basket may not be representative of all households.

This post is adapted from a course paper I wrote for my microeconomics course, and is being posted after receiving permission from my co-author.

References:

Canada Without Poverty. (2018). Just the facts. Retrieved November 12 2018 from http://www.cwp-csp.ca/poverty/just-the-facts/

Corak, M. (2016). “Inequality is the root of social evil”, or maybe not: Two stories about inequality and public policy. Canadian Public Policy, 42(4), 367-414.

Corak, M. (2018). Canada’s official poverty line: what is it? how could it be better? Economics for Public Policy. Retrieved November 12 2018 from https://milescorak.com/2018/08/21/canadas-official-poverty-line-what-is-it-how-could-it-be-better/

Government of Canada. (2018). Canada’s first poverty reduction strategy. Retrieved November 12 2018 from https://www.canada.ca/en/employment-social-development/programs/poverty-reduction/reports/strategy.html#h2.15

Government of Canada. (2018). The changing ethnic composition of Canadian consumers. Office of Consumer Affairs. Retrieved November 12 2018 from https://ic.gc.ca/eic/site/oca-bc.nsf/eng/ca02099.html.

Joseph Rowntree Foundation. (2011). Poverty and ethnicity: A review of the evidence.. Retrieved November 12 2018 from https://www.jrf.org.uk/sites/default/files/jrf/migrated/files/poverty-ethnicity-evidence-summary.pdf

Kerr, D., & Roderic, B. (2001). Child poverty and family structure in Canada. PSC Discussion Paper Series: 15(7).

Pendakur, K. (2001). Consumption poverty in Canada 1969 to 1998. Canadian Public Policy, 27(2): 125-149.

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