Poverty in Europe and the USA: Exchanging Official Measurement Methods

Abstract

Official poverty methodologies differ from other poverty measurement methods in the sense that the ones are more often used as a benchmark to develop new policies as well as to evaluate the performance of existing programs. Europe has the tradition and the practice to use relative poverty as official poverty estimates (Common Laeken indicators); the USA use an objective method to estimate poverty (Orshansky indicator). Although related, each approach portrays different dimensions of poverty. In this study we compare the poverty methodologies of the USA and EU by applying them on datasets of both countries. Using the harmonized European Community Household Panel (ECHP) for the EU and the Panel Study on Income Dynamics (PSID) for the USA, we compare poverty trends in the USA and EU in relative and absolute terms on a national level as well as for various subgroups of the populations. Additionally, we use the panel dimension of the data to analyze individual poverty dynamics. We find considerable differences between the estimates based on Laeken indicators and the estimates based on an Orshansky type of technology. It was expected that in general Orshansky generates lower poverty estimates than the Laeken indicators. However, it is puzzling to find that a.) these differences are less systematic than expected and b.) these differences are not constant over time and in some cases even have the reverse sign. These findings point to the desirability of involving both poverty concepts into (official) poverty assessments.