Vlada republike SrbijeGovernment of the Republic of Serbia

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Theoretical Concepts of Measuring Poverty and Social Exclusion

Poverty by Methodology - Infographic

Poverty by Methodology – Infographic

Nowadays, poverty is most commonly regarded as a multidimensional concept. The dimensions identified as significant for understanding and conceptualising the notion of poverty are: material living standard (income, consumption and wealth), health, education, personal activities (including work), political voice, social connections and relationships, environment and insecurity (of an economic and physical nature) (Stiglitz, Sen, & Fitoussi, 2009, 14). Multidimensionality is also clearly reflected in the comprehensive official definitions accepted by the European Union and United Nations.

Analyses of individuals’ standard of living are still mainly focused on the material dimension only and its measurement, primarily under the absolute and/or relative poverty concepts.

Absolute poverty represents the inability to meet the minimum, basic needs, while relative poverty entails the inability to achieve a standard of living adequate from the perspective of the society in which an individual lives.

That national absolute poverty lines are higher in countries with higher standards is substantiated by data – this means that poverty lines are, in the social and cultural sense, certainly “country-specific” and that, in all countries save the poorest ones, they exceed the psychological minimum of mere subsistence (Ravallion, 2010, 12).

The poverty rate shows the share of individuals in society who cannot meet their basic needs and whose income/consumption is under the poverty threshold (line). The absolute poverty line is, essentially, established on the basis of the nutritional minimum and the poorest households’ consumption pattern. The line is commonly anchored at a given moment in time and uprated by the consumer price index.

Poverty rate, however, does not provide insight into how poor the individuals are, i.e. into the depth of poverty. The indicator used for this purpose is the poverty gap.

Poverty gap (depth) shows how far off the poor population’s consumption/income is from the poverty line. The total deficit (gap) indicates the amount of funds required, assuming perfect targeting, to raise all poor individuals’ consumption/income to the level of the poverty line.

Poverty severity (poverty gap squared), as the third indicator, considers not only the distance from the poverty line, but also the inequality among the poor, by placing higher weight on those households that are further away from the poverty line.

Absolute poverty is most commonly measured by consumption (Ravallion, 1992, 7). The data sources comprise the Household Budget Survey (HBS) and the Living Standards Measurement Survey (LSMS).

Under the absolute poverty concept, extreme poverty is defined in relation to the so-called food line, and all individuals who are unable to meet the basic food needs are considered to be extremely poor. The notion of extreme poverty is also used worldwide to designate the poor who, by the criteria of the poorest countries, subsist on less than $1.25 PPP per day.

For more information on how the food line is set in the Republic of Serbia, see:

Relative poverty may be identified and measured in different ways. The concept is most commonly tied to income poverty.  The most widely used relative (income) poverty indicator is at-risk-of-poverty rate.

At-risk-of-poverty rate represents the proportion of persons with an equivalised income after social transfers below 60% of the national median equivalised income. This proportion of the median income represents the at-risk-of-poverty line/threshold.

Equivalised income is computed by dividing household income by the number of consumption units (equivalent adults) living in that household.  The total number of household members is converted into the number of equivalent adults by applying the OECD-modified equivalence scale, according to which the first adult is assigned the weight of 1, the remaining adults and children over the age of 14 – the weight of 0.5, and children under that age – 0.3. Thus, a household with four members (two adults and two children under 14) will consist of 2.1 equivalent adults (consumption units). The logic of equivalence scales is founded on the fact that household needs grow with each additional member but, owing to economies of scale, not in a proportional way.

Each individual is attributed an aliquot share of the common income of the household in which he/she lives according to the given (OECD) scale; this amount is then compared to the national median income in the given country (the middle value – half of all individuals have income higher than the median, and half – lower). Individuals with less than 60% of the median income are at risk of poverty.

The most common objection to indicators, in particular at-risk-of-poverty rate, is that they, in fact, indicate inequality, rather than poverty. Also, in the initial years of the crisis, according to the at-risk-of-poverty rate, “poverty” in certain EU Member States, in particular new ones, seemed to have decreased. Some of these issues, in fact, gave rise to the introduction of material deprivation indicators and at-risk-of-poverty-or-social-exclusion rate – the AROPE indicator.

Since the adoption of the Europe 2020 strategy, this has been the main indicator of vulnerability[1]. The АROPE indicator shows the proportion of individuals who are at risk of poverty, or severely materially deprived, or living in a household with a low work intensity. At-risk-of-poverty indicators and the AROPE rate are calculated on the basis of the Survey on Income and Living Conditions (SILC).

Material deprivation entails lacking in what is considered necessary for a decent life in a given society. Material deprivation indicates persistent poverty and is not a result of current financial hardship; it is, therefore, regarded as a complementary approach to identifying poverty, enabling an insight beyond what is inferred on the basis of income alone (Boarini & Mira d’Ercole, 2006).

According to the EU methodology, material deprivation is assessed on the basis of whether an individual is able to pay their rent, mortgage or utility bills regularly, to face unexpected expenses, and to afford certain durable consumer goods, a high-quality diet, a holiday and adequate heating.

Thus, in the EU, material deprivation is defined in terms of lacking in what is regarded as necessary for a decent life in the European society, rather than within specific societies.

Material deprivation indicators are material deprivation rate and depth. Material deprivation rate represents the share of the materially deprived population in the total population. Depth of material deprivation represents the mean number of items that the materially deprived portion of the population cannot afford. Severe material deprivation rate is one of the three components of the Europe 2020 headline indicator – at-risk-of-poverty-or-social-exclusion (AROPE) rate.

For more information on theoretical concepts of measuring poverty and social exclusion, see:

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[1] “One of the five key goals of the Europe 2020indicators is the reduction of poverty, by having at least 20 million individuals lifted out of the risk of poverty or social inclusion (AROPE)“ (Eurostat – statistics-explained – Glossary: At risk of poverty or social exclusion (AROPE)).

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