Relative poverty

What Is Relative Poverty?

Relative poverty describes a condition where individuals or households possess significantly fewer financial resources and opportunities than the average in a particular society or region. Unlike absolute poverty, which measures a lack of basic necessities regardless of context, relative poverty is inherently linked to the prevailing standard of living and income distribution within a given country. It is a key concept within the field of economic indicators, helping to illustrate the extent of economic inequality and social disparities. This perspective highlights that poverty is not solely about survival but also about the ability to participate fully in societal activities and attain a socially acceptable quality of life.

History and Origin

The concept of relative poverty gained prominence in the 20th century, particularly through the work of British social researcher Peter Townsend. Townsend argued that poverty should not be understood merely in absolute terms, as this fails to capture the intricate social dynamics of deprivation. He asserted that individuals are in poverty if they lack the resources to participate in the norms of their society, irrespective of whether their basic survival needs are met. This approach highlighted that poverty involves both a lack of resources and an inability to engage in common social and cultural practices. Early ideas influencing the relative definition of poverty can be traced back even further, with thinkers like Adam Smith and Karl Marx recognizing that needs and enjoyments are often measured by society's customs and norms.⁵

Key Takeaways

• Relative poverty gauges an individual's or household's economic standing compared to the average in their society.
• It is often measured as a percentage of the national median income, typically 50% or 60%.
• This measure highlights social and economic disparities and the potential for social exclusion.
• Relative poverty can persist even as overall economic growth occurs, reflecting issues in wealth distribution.

Formula and Calculation

The calculation of relative poverty typically involves establishing a poverty threshold based on a percentage of the median income of a given population. The most commonly used thresholds are 50% or 60% of the national median equivalized disposable income (income after taxes and transfers, adjusted for household size).

The formula can be expressed as:

Where:

• (X%) represents the chosen percentage, most commonly 50% or 60%.
• Median Equivalized Disposable Income is the middle value of income in the population, adjusted to account for differences in household size and composition, recognizing that larger households require more income to achieve the same standard of living.

For example, if the median equivalized disposable income in a country is $40,000, a 60% relative poverty threshold would be $24,000. Any household with an equivalized disposable income below this amount would be considered to be in relative poverty.

Interpreting the Relative Poverty

Interpreting relative poverty involves understanding its implications beyond mere financial figures. A high relative poverty rate can signal significant economic inequality within a society. It indicates that a substantial portion of the population is unable to participate fully in customary social and economic activities, even if their basic survival needs are met. For example, individuals experiencing relative poverty might struggle to afford adequate housing, transportation, access to quality education, or participation in recreational activities that are common for the majority. This inability to afford a widely accepted standard of living can lead to feelings of marginalization and contribute to broader societal issues, including reduced social cohesion and increased demand for social welfare programs. Policy makers and researchers use relative poverty measures to assess the well-being of different demographic groups and to evaluate the effectiveness of policies aimed at reducing disparities and fostering economic development.

Hypothetical Example

Consider a hypothetical country, "Prosperia," where the annual median income for a two-person household income is $60,000. Prosperia uses a relative poverty threshold of 60% of the median income.

1. Calculate the Relative Poverty Threshold:
   0.60 (60%) x $60,000 = $36,000

2. Evaluate a Household's Status:
   A household in Prosperia consisting of two people earns an annual income of $32,000.

3. Determine Poverty Status:
   Since $32,000 is less than the $36,000 relative poverty threshold, this household would be considered to be experiencing relative poverty in Prosperia. While they might be able to afford basic food and shelter, their income significantly lags behind the average for their society, potentially limiting their access to typical goods, services, and opportunities that contribute to the accepted standard of living.

Practical Applications

Relative poverty measures are widely used by international organizations, governments, and researchers to assess social well-being and guide policy. The Organisation for Economic Co-operation and Development (OECD), for instance, defines its poverty rate as the ratio of the population whose income falls below half the median household income of the total population.⁴ Similarly, the European Union measures relative poverty as 60% of the median equivalized disposable income after social transfers.³

These measures are crucial in several areas:

• Policy Formulation: Governments use relative poverty data to design and implement social safety net programs, evaluate the impact of income redistribution policies, and allocate resources to areas with high rates of deprivation.
• International Comparisons: Relative poverty provides a consistent framework for comparing living standards and inequality across different countries, adjusted for local economic realities and purchasing power parity.
• Social Analysis: Researchers utilize relative poverty to study trends in social mobility, assess the risk of social exclusion, and understand the long-term effects of economic disparities on communities. For example, reports on child poverty often highlight relative poverty rates as an indicator of future challenges for younger generations.
• Economic Performance Evaluation: While not a direct measure of absolute deprivation, the persistence or rise of relative poverty can indicate that the benefits of economic growth are not being equitably distributed across the population.

Limitations and Criticisms

While providing valuable insights into social disparities, relative poverty measures are not without their limitations and criticisms. A primary critique is that relative poverty can increase even when the poorest members of society experience an improvement in their absolute material conditions, simply because the overall median income of the society has risen at a faster rate. This can lead to the unintuitive outcome where poverty appears to worsen during periods of general affluence or even when all incomes are rising.²

Critics argue that focusing solely on relative poverty might misrepresent actual deprivation, especially when comparing vastly different economies. A person considered relatively poor in a wealthy nation might have a higher standard of living than someone considered non-poor in a much poorer country. Furthermore, relative measures may be sensitive to economic fluctuations; during a recession, if the median income falls significantly, the relative poverty rate could theoretically decrease even as more people struggle to meet basic needs, because the threshold itself has lowered. This suggests that relative poverty primarily functions as a measure of economic inequality rather than absolute hardship.¹

Additionally, the choice of the threshold percentage (e.g., 50% or 60%) can be arbitrary and influence the reported rates, making cross-study comparisons challenging. The reliance on income as the primary metric for relative poverty can also overlook other factors contributing to well-being, such as access to public services, non-cash benefits, or actual consumption expenditures.

Relative Poverty vs. Absolute Poverty

The distinction between relative poverty and absolute poverty is fundamental to understanding different dimensions of economic hardship.

Absolute Poverty
Absolute poverty refers to a state where individuals or households lack the minimum necessities for survival, such as food, safe drinking water, shelter, and basic healthcare. This measure is based on a fixed, universal threshold, often expressed as a specific monetary amount per day (e.g., the World Bank's international poverty line). It does not change with the economic conditions or average living standards of a particular country. If a country experiences economic growth and incomes rise for everyone, the number of people in absolute poverty should decrease, assuming the growth benefits the poorest.

Relative Poverty
In contrast, relative poverty defines hardship in relation to the prevailing standard of living within a specific society. An individual is considered to be in relative poverty if their income falls below a certain percentage (commonly 50% or 60%) of the national median income. This means the threshold for relative poverty will vary from country to country and can change over time as a society's overall wealth or income levels shift. It highlights the problem of social exclusion and significant disparities in income distribution. While someone in relative poverty may have their basic needs met, they are unable to participate in the common activities and enjoy the lifestyle considered normal within their society.

The primary confusion between the two arises because a country could have very low absolute poverty but still significant relative poverty if its wealth is highly concentrated. Conversely, a less developed country might have high absolute poverty but lower relative poverty if income disparities are not as pronounced.

FAQs

What does it mean to be in relative poverty?

Being in relative poverty means that your income or resources are substantially lower than the average or median income within your specific society. It implies that you cannot afford the goods, services, and activities that are considered typical or customary for the majority of people in your country, even if you can meet your basic survival needs.

How is the relative poverty line typically determined?

The relative poverty line is most commonly set at a percentage of the national median income. For example, many European countries and organizations like the OECD use a threshold of 60% of the median equivalized disposable income. This means anyone earning less than 60% of what the middle-income earner takes home, adjusted for household size, is considered to be in relative poverty.

Can relative poverty exist in a wealthy country?

Yes, absolutely. In fact, relative poverty is often more discussed in wealthy, developed countries where absolute deprivation (lacking food, shelter, etc.) may be less widespread. Even if a country's overall wealth and economic growth are high, significant disparities in income distribution can lead to a substantial portion of the population living in relative poverty.

What are the main impacts of relative poverty?

The impacts of relative poverty go beyond financial hardship. Individuals experiencing relative poverty may face social exclusion, limited opportunities for education and advancement, poorer health outcomes, and a reduced ability to participate fully in community life. It can also contribute to societal instability and increase demand on public services and the social safety net.

Is relative poverty a better measure than absolute poverty?

Neither measure is inherently "better"; they serve different purposes. Absolute poverty is critical for assessing severe deprivation and basic human needs, especially in developing countries. Relative poverty is more useful for understanding economic inequality and social cohesion within a given society, particularly in developed nations where the focus shifts from mere survival to the ability to participate in a common standard of living. Many analyses use both measures to gain a comprehensive understanding of poverty.