A new methodology for estimating internationally comparable poverty lines and living wage rates

169 Pages·2006·0.85 MB·English

A new methodology for estimating internationally comparable
poverty lines and living wage rates
Working Paper No. 72
Richard Anker*

Policy Integration Department
Statistical Development and Analysis Group
International Labour Office
Geneva
July 2005
* Visiting scholar Wesleyan University

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A new methodology for estimating internationally comparable
poverty lines and living wage rates
Contents
Page
Acknowledgments ............................................................................................................................. v
Executive Summary .......................................................................................................................... vii
Part 1: Introduction and background on poverty and living wage rate ............................................. 1
1. Introduction............................................................................................................................. 1
2. Poverty and its relationship to living wage rate ...................................................................... 4
2.1 Definition of poverty .................................................................................................... 4
2.2 Congruity of poverty and living wage concepts ........................................................... 4
2.3 Use of one poverty line................................................................................................. 6
2.4 Quasi-relative nature of poverty lines and therefore living wage rates ........................ 7
Part 2: Methodology for measuring internationally comparable national poverty lines and
living wage rates ..................................................................................................................... 10
3. General description of methodology for estimating national poverty lines and
living wage rates ..................................................................................................................... 10
4. Establishing national model diet and estimating food cost for our poverty line..................... 13
4.1 Total calorie requirements ........................................................................................... 14
4.2 Typical major food groups in model diets .................................................................... 18
4.3 Taking into consideration local food preferences ......................................................... 23
4.4 Acceptable amounts of carbohydrates, proteins, and fats............................................. 24
4.5 Selecting specific foods to include in major food groups and costing them................. 32
4.5.1 Selecting specific foods ...................................................................................... 32
4.5.2 More detailed discussion on selection, quantity and costing of specific foods
included in each major food group ..................................................................... 34
4.6 Miscellaneous additional food costs ............................................................................. 37
4.7 Summary for establishing and costing national model diets......................................... 41
5. Non-food costs, taking into consideration family size, and full-time working hours ............. 43
5.1 Estimating non-food costs to include in poverty line ................................................... 43
5.2 Going from cost per person to cost for a household ..................................................... 48
5.3 Number of full-time working hours per week .............................................................. 52
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6. Possible limitations of methodology....................................................................................... 55
6.1 Ignoring non-labour income when estimating living wage rate ................................... 55
6.2 Ignoring multiple earners in households when estimating living wage rate................. 56
6.3 Ignoring differing family sizes around the world for estimating poverty lines and
living wage rates ........................................................................................................... 57
6.4 Ignoring home production work that is self-consumed ................................................ 59
6.5 Incomplete and inappropriate information on food prices and local food habits for
establishing and costing model diet .............................................................................. 60
6.5.1 Incomplete list of foods in ILO food price data set ............................................ 60
6.5.2 Missing food price data in ILO food price data set ............................................ 60
6.5.3 Poor and non-poor may consume different varieties of certain food items........ 61
6.5.4 Food prices paid by poor may differ from prices in ILO food price data set ..... 62
6.5.5 Food prices may differ within countries and over the year ................................ 63
6.6 Inexactness of number of calories per gram of edible food.......................................... 65
6.7 Ignoring private cost of typical public goods such as health care and education ......... 66
6.8 Ignoring crises and debt................................................................................................ 67
6.9 Ignoring taxes ............................................................................................................... 67
Part 3: Poverty line and living wage rate estimates for 12 countries: Testing the methodology....... 69
7. National model diets and food cost estimates for study countries .......................................... 70
7.1 Composition of our national model diets...................................................................... 70
7.2 Evaluation of composition of our model diets by major food group ............................ 71
7.3 Evaluation of model diets in terms of proteins, fats and carbohydrates ....................... 73
7.4 Composition of our model diets compared to composition of model diet used
by countries to estimate their national poverty line ...................................................... 75
7.5 Evaluating distribution of food costs across food groups in our model diets ............... 81
8. National poverty lines for study countries .............................................................................. 84
8.1 Inappropriateness of World Bank PPP methodology for estimating national
poverty lines.................................................................................................................. 84
8.1.1 Conceptual issues on use of World Bank PPP methodology for
estimating national poverty lines ........................................................................ 84
8.1.2 Empirical evidence on use of World Bank PPP for estimating
national poverty lines.......................................................................................... 86
8.1.3 PPPs used for our study countries....................................................................... 91
8.2 Our poverty line estimates for study countries and comparison to
poverty lines of countries and the World Bank............................................................. 93
9. National living wage rates for study countries........................................................................ 99
9.1 Living wage rate estimates for study countries............................................................. 99
9.2 Comparing our living wage rate estimates to actual median wage
rates for study countries ................................................................................................ 101
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9.3 Affect on living wage rate estimates of private costs for typical public goods:
Example of health care in United States ....................................................................... 107
Part 5: Conclusions............................................................................................................................ 109
10. Summary and Conclusions...................................................................................................... 109
Appendices ........................................................................................................................................ 113
Appendix A: Sensitivity analysis of poverty line and living wage rate estimates to
assumptions in our methodology ............................................................................................ 113
Appendix B: New food parity purchasing power (PPP) estimates (that are especially
relevant for the poor) using methodology in this paper compared to PPP.............................. 119
Appendix C: Spreadsheets used to estimate national poverty lines and national living wage
rates for study countries .......................................................................................................... 127
Appendix D. Notes for study countries on unit food prices when they were not available in
ILO food price database and on exceptions to general principles for establishing and
costing national model diets.................................................................................................... 131
Appendix E: Food items included in ILO food prices database ............................................. 134
Appendix F: Number of working poor implied by methodology used in this paper .............. 137
Appendix G: Nutritional content and edible proportion of foods ........................................... 138
References ......................................................................................................................................... 143
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Acknowledgments
I would like to thank Peter Peek for his support, encouragement and insightful suggestions
throughout this work. I would also like to thank Joseph Ritter, Hamid Tabatabai,
David Kucera, Bill Myers and Janet Nelson-Arazi for helpful comments and suggestions
on earlier drafts. Rachael Giles and Hiep Nguyen provided valuable statistical and other
assistance. As usual, Martha Anker deserves the greatest thanks for her help and
indispensable inputs.
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Preface
Poverty reduction is at the centre of the current debate on development. The most
important United Nations’ Millenium Development goal is to reduce poverty by half in
2015. Despite the importance of this topic, little advance has been made in improving the
measurement of poverty. There has been an important debate on the problems of national
poverty line estimates, but few improvements have been made in suggesting ways of
making the estimates more comparable across countries.
This paper proposes a methodology for measuring national poverty lines that are more
comparable, internationally, than any of the existing approaches. The methodology is
normatively based, using a nutritious low cost diet, and it is relevant to all countries in the
world. It can be used for calculating national poverty lines and for making regional and
global estimates. The method is easy to understand, and to use.
The second part of the paper proposes a method for calculating living wage rates. Based on
the poverty line estimates developed here, it suggests a living wage rate expressed in terms
of an hourly wage rate a full-time worker would need to earn so that her or his family is
above the poverty line.
As the author points out, this paper represents work in progress. More discussion is needed
on the assumptions made for calculating poverty lines and living wages. There is also a
need for more debate on what constitutes a living wage, particularly in countries where
incomes from self employment and migrant remittances are important.
It is hoped that this paper will stimulate further debate how the measurement of poverty
and living wages can be improved so that policy makers are better informed.

Peter Peek
Manager
Statistical Development and Analysis Group
Policy Integration Department
International Labour Office
July 2005

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