Why is “anchoring” the best way to monitor child poverty during an economic crisis?

At times of economic turbulence, the way we measure poverty can make a big difference to the conclusions we draw. Income poverty across the European Union is conventionally defined as the share of the population whose household income (adjusted for size and composition) after taxes and social transfers is below 60% of the national median. As a relative measure of monetary poverty, it identifies those who are at risk of falling below the general standard of living enjoyed by the society in which they live.

The very nature of this indicator makes it less useful for monitoring poverty at times of rapid change in living standards during an economic crisis. If the median income falls, the poverty line will decrease, potentially making some of those below the poverty line appear to be out of poverty even if they are becoming worse off. “For this reason, for comparisons over time, it may also be advisable to anchor the threshold at a specific point in time (i.e. a past reference year) during crises or other periods of major change in the economic environment” (Eurostat).

One of the most illustrative example of what difference fixing the poverty line at a point in time can make is Greece. Using the national median income in 2008 prices as a backdrop (right-hand axis), the figure below plots three indicators on the left-hand axis: 1) the child poverty rate, 2) the anchored child poverty rate, and 3) the severe child deprivation rate.

Between 2008 and 2010, there is little change in any of the indicators, while the median income is increasing slightly in real terms (i.e. adjusting for inflation). From 2010 onwards, all three measures of child poverty go up, including severe material deprivation. The anchored child poverty rate increases from 20.7% in 2010 to 51.8% in 2013, while the traditionally measured child poverty rate goes up from 23% in 2010 to 28.8% in 2013.

Source: Eurostat (last update 29.10.2014)
Source: Eurostat (last update 29.10.2014)

As of 2013, are one in two children in Greece living in poor households or one in four?

The answer is that both measures are valid and complementary to each other. Over one in four (28.8%) are at risk of poverty given the current general standard of living. More than one in two (51.8%) are falling below the standard of living prevailing in 2008. It just so happens that the national median income in 2013 is two-thirds of that in 2008 in real terms.

The difference between these two measures hinges on whether, at times when many have become worse off, we only compare our standard of living to those around us or whether we also think about how much we could do with the money we had five years ago (and how much prices have gone up in the meantime).

However, to assess change in the material conditions of children during the economic crisis, e.g. between 2008 and 2013, it is a good idea to use the same poverty line in both years. This is what anchoring the poverty line in 2008 does. During this period, child poverty in Greece went up by a factor of 2.25. At the same time, the share of children living in severely deprived households went up by the same factor (2.24), from 10.4% to 23.3%.

Disclaimer: the views expressed in this post are the responsibility of the author alone.

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Why is “anchoring” the best way to monitor child poverty during an economic crisis?

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