The purpose of this paper is to suggest an improved measure of financial
poverty, based on household consumption and wealth as well as income.
Data come from the Household, Income and Labour Dynamics Australia
(HILDA) Survey, which appears to be the first national socio-economic
panel survey to provide longitudinal data on all three measures of
household economic well-being. National measures of poverty in Australia
and other Western countries are usually based only on low income. But
this is conceptually incorrect; the measures lack validity. To be poor
is to have a low material standard of living-involuntarily. So measures
of poverty should also take account of household consumption and wealth.
If a household has an adequate current level of consumption, it should
not be classified as poor right now, even if its current income is low.
Similarly, if it has substantial wealth (net worth), it should not be
viewed as poor because it could draw down on wealth to boost current
consumption. The invalidity of income-based measures has long been
recognised in principle (Ringen 1987, The possibility of politics.
Oxford: Clarendon Press). In practical terms, the problem is to combine
measures of wealth and income, and especially consumption, in the same
survey. In the 2005 HILDA Survey a battery of household expenditure
items was included which, benchmarked against the Australian Bureau of
Statistics' Household Expenditure Survey for 2003-04, appeared to
provide valid measurement of 53.4% of total household expenditure.
These well measured items correlated 0.76 with total expenditure and, in
combination with standard demographic variables, accounted for 78.3% of
the variance in the total. This paper uses 2005-06 HILDA data to
construct revised measures of financial poverty. The value of these
measures for public policy and research purposes is illustrated. In
particular, the new measures give much lower estimates of poverty than
income-based measures. They can also be used to predict which households
are at risk of future poverty.
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