Asset-Based Measurement of Poverty Andrea Brandolini Banca d’Italia, Department for Structural...
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Asset-Based Measurement of Poverty Andrea Brandolini Banca d’Italia, Department for Structural Economic Analysis Silvia Magri Banca d’Italia, Department for Structural Economic Analysis Timothy M. Smeeding Institute for Research on Poverty and University of Wisconsin “European measures of income, poverty, and social exclusion recent developments and lessons for U.S. poverty measurement” APPAM - Special Pre-Conference Workshop 4 November 2009, Washington D.C.
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Transcript of Asset-Based Measurement of Poverty Andrea Brandolini Banca d’Italia, Department for Structural...
Asset-Based Measurementof Poverty
Andrea BrandoliniBanca d’Italia, Department for Structural Economic Analysis
Silvia MagriBanca d’Italia, Department for Structural Economic Analysis
Timothy M. SmeedingInstitute for Research on Poverty and University of Wisconsin
“European measures of income, poverty, and social exclusion recent developments and lessons for U.S. poverty measurement”
APPAM - Special Pre-Conference Workshop 4 November 2009, Washington D.C.
The problem (1)
0
10,000
20,000
30,000
40,000
50,000
Italy France Germany Japan UnitedKingdom
Canada United States
0
60,000
120,000
180,000
240,000
300,000Per capita GNI Per capita net worth
Per capita GNI and net worth (US$, PPP, 2005)
The problem (1)
0
10,000
20,000
30,000
40,000
50,000
Italy France Germany Japan UnitedKingdom
Canada United States
0
60,000
120,000
180,000
240,000
300,000Per capita GNI Per capita net worth
Per capita GNI and net worth (US$, PPP, 2005)
• How to account for wealth in measures of well-being
– Here, focus on poverty
• Two reasons to go beyond purely income-based measure of poverty
– Well-being: Income-poor have different living standards depending on net assets
– Lifetime equity: chances in one’s life much depend on the set of opportunities open to a person which are, in turn, a function of the person’s endowments
The problem (2)
• Our aim– develop tools to monitor standard of living: how
net worth affects households’ current economic well-being
– relevant for social policy: assets may condition eligibility to means-tested public benefits
• Outline
– Conceptual framework Income-net worth Asset poverty
– Comparative results from the LWS
Aim & Outline
• Insufficiency of current income
CY = Y + r NW
Y incomes from labour, pensions, transfersr NW property incomes (r interest rate, NW net worth)
• Underestimates resources at individual’s disposal: in principle, people can spend all NW
Total financial resources:
FR = CY + NW = Y + (1+r) NW
Conceptual framework (1)
NW
Y
Conceptual framework (2)
Z
poor if: CY = Y + r NW < Z → Y < Z – r NW
Labour income
Net worthpoor if: FR = Y + (1+r) NW < Z
→ Y < Z – (1+r) NW
• Intermediate solution
• Weisbrod and Hansen (1968): income-net worth
– Convert net worth into constant flow of income, i.e. replace actual property incomes with n-year annuity value of net worth
ρ n length of annuityAY = Y + ————— NW ρ interest rate
1 - (1+ρ)-n
n → ∞ only interest, AY=CY n = 1 all net worth, AY=FR
– n = life expectancy [hp: no wealth left at death]
Conceptual framework (3)
NW
Y
Conceptual framework (4)
Z
Labour income
Net worth
n ↓
• Theoretically neat solution but several measurement assumptions:
– length of annuity
– interest rate
– wealth aggregate that is annuitized
– treatment of couples
– population subgroups whose wealth is annuitized
– allowance for bequests/precautionary saving
– poverty threshold
Conceptual framework (5)
elderly look much better, on average
Conceptual framework (6)
Percentage annuity rate
by age
0
5
10
15
20
25
30
0 10 20 30 40 50 60 70 80 90
Age
2% rate2% annuity rate6% rate6% annuity rate
• Impose less structure on data supplement income-based with asset-based poverty measures
• Exposure to potential risk → vulnerability more than poverty
• asset-poor = wealth < fraction of income poverty line
Haveman and Wolff (2004)– Fraction = 1/4– “net worth”: indicator of “long-run economic security
of families”– “liquid assets”: indicator of “emergency fund
availability”
Conceptual framework (7)
NW
Y
Conceptual framework (8)
Z
Labour income
Net worth
Asset poor only
Asset and income poor
ζ Z
• Application based on a novel database
Luxembourg Wealth Study
– Broadly comparable database containing wealth variables for 10 countries
– Based on existing datasets harmonized ex post
– Caution: wealth is difficult to measure, definitions vary across countries
Some comparative results (1)
Some comparative results (2)
• Lower poverty ratios
• Country ranking unchanged, but biggest reduction in Italy
• Smaller effect if financial assets annuitized
• Narrowing of differences between US and Europe for the elderly (not shown)
% SHARE OF POOR HOUSEHOLDS(head life expectancy, 2% rate, zero bequest, only heads 55+)
8.49.2
11.3
14.5
16.6
10.712.5 12.9
17.4
19.5
0
5
10
15
20
25
Finland1998
Italy 2002 Germany2002
USA PSID2001
USA SCF2001
Income-net worth poor
Income poor
Some comparative results (3)
• Income & financial asset poor not terribly different from income poor• Many households have little financial assets
10 11 12 13 1315
17 1720
68 7
9 10 1013 15 15
43
49
36
32
52
46
57
53
45
0
10
20
30
40
50
60
Sweden2002
Finland1998
Norway2002
Italy 2002 Germany2002
UK 2000 Canada1999
US(PSID)2001
US(SCF)2001
Income poor Income & financial asset poor Financial asset poor
% SHARE OF POOR HOUSEHOLDS
• Need to integrate wealth into the analysis of poverty and inequality
• Empirical problem:– income & wealth together– better wealth data – need ex ante standardization of methods and
definitions • Asset-related measures of poverty have distinctive
informative value with respect to income-based statistics– Pools of asset-poor and income-poor do not coincide – Better understand properties of alternative indicators
Conclusions
MANY THANKS FOR YOUR ATTENTION
