inequality12- Borgeraas

Proceedings of the Nordic Consumer Policy Research Conference 2007

1

Low income and “poverty lines” in Norway – A comparison of three concepts

Elling Borgeraas, National institute for consumer research (SIFO), Oslo, Norway Email: [email protected] Espen Dahl, Oslo University Colege, Oslo Norway Email: [email protected]

Abstract In this paper we address the question how well do “poverty” as defined by three different poverty concepts correspond. We have compared three different measures of “poverty” in Norway: income poverty, and two measures of a minimum budget standard, one scientifically and one politically defined. The three measures rest on different underlying concepts, serving different purposes and yielding significantly different poverty lines. If followed by the municipal social services, the Governmental norms for social benefits will, paradoxically, leave the beneficiaries in income poverty as defined by the same Government. The most generous poverty line of all three measures is provided by the minimum budget standard developed by SIFO, which rests on the assumption that a household’s income needs to give a sustainable financial situation in the longer run. Neither of the two other poverty measures have this property. Some political and practical implications of the findings are discussed.

1. Introduction

The question we address in this paper is how well three different poverty definitions, all in use in Norway, correspond, or more accurately where they draw their poverty lines. It is widely recognised that in late-modern, affluent Western societies, poverty is a relative phenomenon; it has to do with social participation and lack of resources that enable people to live a “normal” life. In this article we adopt this notion of relative poverty. However, “poverty” may be defined and measured in a number of ways. The number of poor and who are poor will be heavily affected by the definitions and measures we use. Countries have different ways to define and measure poverty. Recently, however, within the EU a consensus has now been reached on this matter (Atkinson et al. 2002). The EU member countries agree that those having an income less than 60 per cent of the median are considered “poor”. In Norway as well, the official view on poverty is close, but not identical to this notion. The use of income to define poverty may be justified by on the ground that income is essential in societies with market economies, the measure is widely available, relatively easy to compare in time and space, and has a common and intuitive understanding. In Norway as in the EU, the income limit approach is the official way to define poverty. The income limit approach has however been extensively criticized. It has variously been accused for being arbitrary, that it has no


2

reference to “need”, that it is conceptually empty, and that it is an indirect measure of poverty. Suggested alternatives are abundant. In this article we adopt a need based approach, a minimum budget standard, which takes into account the economic resources to be commanded by households of different size and composition in order to achieve a normal and sustainable living standard and social participation. These two measures are compared with the official social assistance norms decided by the former Ministry of Social Affairs, now The Ministry of Labour and Social Inclusion. These norms are intended to serve as guidelines for the local social assistance departments when they assess who gets what. All three measures have been suggested for official use in Norway. However, the Ministry has so far rejected the minimum budget developed by SIFO (National Institute for Consumer Research).

2. Defining poverty – some conceptual challenges

Today, research on level of living and consumption stands out as two quite different traditions. Until the Second World War, however, they were practically flip sides of the same coin (see Collette 2000). Thus, the early classics Ducpétiaux (1804 – 1868) in Belgium, Le Play (1806 – 1882) in France and Engel (1821 – 1896) in Germany may be seen as the founding fathers of modern studies of both research traditions. Engel utilized the empirical material from the two former researchers – consumption items, patterns of consumption and income – to formulate one of the best documented economic “laws” ever; viz. Engel’s law:

.. je armer eine Familie ist, einen desto grösseren Antheil von der Gesamtausgabe muss zur Beschaffung der Nahrung aufgewendet werden (Engel 1895:28-29).

The development of income standards based on consumption studies is a prominent feature of poverty research during the first part of the 19.th century. Best known is perhaps Booth and, not to mention, Rowntree’s study from 1901 (Rowtree 2000 [1901]. These works may be seen as a further development of the continental, classic studies on consumption and levels of living, where definitions of poverty thresholds (i.e. Rowntree’s primary and secondary poverty) are based on a mix of scientific theorising and normative principles. The income levels defining poverty were supplied with content by explicitly taking into consideration the relationship between consumption and living conditions. Orschansky (1965) took Rowntree’s account a step further by using it to create a food basket, which in turn became the poverty line in USA (Glennerster 2000, Fisher 1992). Even though the demarcation line between poverty and non-poverty was — and still is — open to criticism, its main advantage is transparency. In fact, there is little confusion about the definition as such. Instead, criticisms are directed towards the methodological assumptions, the composition of basic items and their relation to poverty in substantial terms (Bradshaw 2001, Saunders 1999).

After the Second Word War, the studies of level of living and consumption gradually developed into two different and distinct traditions; the income approach as opposed to the consumption approach.1 The former no doubt gained more scientific legitimacy and political support than the latter. This is also the situation today. Research on poverty in Europe and Norway is more or less exclusively dominated by income and income measures, even though there are a few poverty researchers who from time to time make the case for a consumption -, or budget based approach (Bradshaw 1993, Saunders 1998). This account is not exhaustive, however. Veit-Wilson (1998) outlines three scientific, empirical approaches to poverty: the 1 This development may be explained by the so called “ordinalist revolution” in economic theory – “the rejection of cardinal notion of utility and the general acceptance of the position that utility was not comparable between individuals” (Cooter and Rappoport, 1984).


3

deprivation indicator approach, the attitudinal approach, and the budget approach. The first correlates social necessities as identified in general population surveys with income levels; the second compares actual incomes with estimated levels at which “ends could be met”; and the third, which Veit-Wilson calls a hybrid between a scientific and a prescriptive approach, shows the income levels at which a range of conventional life-styles in theory could be achieved. This approach is partly but not totally prescriptive or normative because it avoids prescribing the minimum level of living (Veit-Wilson 1998:19). In our account we focus on poverty defined by measures based on income as well as consumption.

The most common definition of poverty in use is based on the median income, as for instance EU’s 50 percent of median income threshold. This is a powerful and influential approach widely applied by governmental (e.g. OECD and the EU) and scientific bodies such as the Luxembourg Income Study (LIS).These kinds of indirect measures are useful and appropriate for several purposes; medians are simple and straightforward to grasp, they enable comparisons over time and across countries, and income statistics are easily available. From a theoretical point of view they allow for what is known as ‘neutrality of preference’: “With indirect measure, wellbeing is measured by the choices people can make” (Ringen 1995:10). Thus, according to the proponents of this view, there is no compelling reason to replace the income limit definition of poverty by some other measure. This distinction between indirect measures of poverty, for example income, and direct measures of poverty, for example deprivation of living conditions, is important. In addition to the theoretical argument, the use of income in defining poverty has several practical advantages. Income data are easily available and measurement is straight forward. Only one single variable is sufficient in contrast to complicated measurement procedures and index constructions of many items, like in the Nordic living conditions approach. Moreover, most people have an intuitive understanding of income limits. The widespread use of the income limit approach and its popularity amongst international organisations like OECD and EU is probably best explained by its convenience in these terms.

Yet, the income limit approach to poverty has its critics. First, according to Veit-Wilson, income may be criticized for being non-scientific in the sense that they may or may not be related to “poverty”, i.e. material deprivation and social exclusion. Much of the critique of income measures is not directed against the measures as such, but rather against certain uses of them. Of course, such measures may be very important and efficient — even unrivalled — in a number of research approaches as for instance when monitoring the development of inequality in society. But if the purpose is to define actual income levels for people and households, it is highly problematic. In this case it is vital that the defined thresholds actually ensure an adequate – or at least known - level of living. The in principle arbitrary statistical definitions of income levels are not the appropriate way to handle this kind of challenge. A crucial challenge for the research community is, as we see it, to identify appropriate income thresholds by taking consumption as the point of departure. As an alternative to technical measures such as the 50% of the median income we ask: what is the price tag for a set of items that may be seen as necessary to ensure a reasonable viability level/sustainability for households of different size and composition?

3. Three poverty concepts

In this section we offer a discussion of three poverty concepts which later will be compared.


4

Income poverty In the European Union (EU), income poverty is one of the key indicators in the monitoring of and battle against social exclusion (Atkinson et al. 2001, Joint Report on Social exclusion 2003). According to the official view taken by the EU, the poor are defined as “individuals or families whose resources are so small as to exclude them from the minimal acceptable way of life of the Member State in which they live” (Atkinson et al 2001:52). Here we find a notion of a social minimum norm of “way of life” which people should not fall below. Also the notion of “way of life” is broader than pure financial matters and includes presumably life styles, and social participation and activities in addition to material living standards.

The so called Sub-Group on Social Indicators recommended income as the common poverty indicator among the EU member states. The Sub-Group’s primary justification for making income poverty their main poverty indicator was that “it provides a poverty line that facilitates cross national comparisons” (Atkinson 2001:55). The Sub-Group recommended that net equivalised household income should be interpreted as purchasing power (p.65). At the same time the Sub-Group pointed out that a serious drawback that the chosen percentage is arbitrary and moreover far from neutral in its influence on cross-national comparisons. Further, the Sub-Group acknowledged the value of the expenditure or consumption approach on the ground that these measures are closer to standards of living than income. Over all, however, the Sub-Group concluded that “we do not feel that there are strong enough grounds to reverse the move to an income basis” (Atkinson et al. 2001). They gave several reasons for this point of view: first, that income measures were available on an annual basis from all member countries, and that considerable work was invested to validate the measure. A common EU poverty indicator based on expenditures would on the other hand require harmonised budget surveys in all member countries. In this area, the Sub-Group states, considerable research effort is needed in the future.

In summary, the Sub-Group is explicit in that their justification to keep income as the basis for drawing the poverty line rests mainly, if not entirely on practical arguments. One of the main concerns of the Sub-Group was cross-national comparability, and this has strongly affected the Group’s recommendations. However, for one single country this concern is much less compelling. Thus, the argument to prefer income to consumption when drawing the poverty line looses weight when the purpose is to validate the income poverty line, and not to make comparisons between countries.

In 2002, Norway has now joined the EU effort to combat social exclusion. The “Action Plan against Poverty” (St.meld. nr. 6 2002-2003. Tiltaksplan mot fattigdom) was the Norwegian equivalent to the EU countries’ national inclusion plans. The Action Plan outlined a five year action program with the ambition to eradicate poverty in Norway in general, and child poverty in particular. Poverty is defined in these terms:”By poverty we mean that individuals have so low income, possibly combined with high, necessary expenditures related to illness and impairment etc, that they in the long run are unable to fulfil basic welfare needs”. “Individuals who find themselves below this income limit have an income which departs significantly from the general income level in the population” (pX). It is further claimed that: ”a sufficient and predictable income is a necessary condition to achieve an acceptable living standard” (p7), but no objective, external criteria to assess what a “sufficient income” is, is put forward. The Plan admits that low income is a one dimensional measure for a complex problem, but argues that it often shows a relationship with problematic living conditions in other areas. Low income is thus used as an indicator of people’s total economic and social living conditions (p8). ”In the long run” is operationalised as poverty lasting for three years. This means that the existence of short term poverty and transitional poverty, e.g. students, is not regarded as problematic. Also


5

temporary problems related to inability pay ones bills, disposal of money or debt is explicitly considered beyond the current Government’s understanding of poverty.

50 per cent of the median is selected as the poverty limit. To justify this limit, the Plan simply refers to what is common nationally and internationally. Yet, it is acknowledged that when the income limit is drawn in this way, no answer is given as to whom has insufficient income in relation to meeting basic welfare needs. It is pointed out that several have argued to add calculations of costs of living to the current income measure of poverty. “The Ministry of Social Affairs has therefore asked SIFO to develop a material for a minimum standard for necessary costs of living…” This latter statement is the backdrop for the project SIFO has undertaken and which partly provides the basis for this paper.

The Minimum Budget The consumption approach utilizes the classical tradition by specifying the basket of goods that are necessary to satisfy basic needs in a given society. This does not mean that the selection of goods is the primary goal, on the contrary; the basket must be seen as a method to estimate the cost of having a specific consumption level, or – that is the same – a specific income level. The primary goal is thus to define an income level – the basket of goods is only part of a method to reach this aim. The basket of goods has two important advantages to the income approach. Firstly, it serves as a mean to specify an income level; secondly it gives confidence to the view that it is possible to have a given consumption level for a certain amount of money. As the items in the consumer price index, the items are only representative of a given level of living and could be substituted by a variety of alternative items.

For many years, The National Institute for Consumer Research (SIFO) has applied a basket of goods to define a reasonable expenditure level, the so called Standard Budget. The Norwegian standard budget consists of – in principle – a complete list of goods and services which are considered necessary if the household is to maintain a reasonable consumption level over a great number of consumption sectors. The ambition of the Norwegian Standard Budget is to define a «reasonable» consumption level. This is neither a subsistence nor a luxury level, but a consumption level satisfying the welfare ambitions in the Norwegian society. The budget is not dedicated to distinct social or economic strata, but is in principle suitable for the «average» household in Norway.

SIFO’s commission was to develop a proposition to a low cost budget utilizing the existing Standard Budget. The Government needed this as an input to the development of a recommended minimum level for social assistance. The Standard Budget defines a modest, but adequate consumption level, assuming that families living on this budget are able to preserve this level in the long run. This assumption has several practical and theoretical implications. First of all it has a consequence regarding the items included. In addition to items used in the daily consumption, the budget also includes durable goods, such as furniture, household equipment (washing machine, stove etc), radio, TV, PC, camera etc.. All durable goods are depreciated, taking the actual price divided on the items lifespan, broken down to cost per month. The implication is that the calculated consumption expenditure contains a certain share of savings each month. These savings are meant to be used to pay for rare purchases. The saving part of the consumption expenditures in the standard budget is important because it safeguards a certain economic freedom. This economic freedom may be interpreted in two distinct directions. Firstly, as it literally means, i.e. as freedom to buy durable goods, with a duration for more than one month, without reducing the spending on daily consumption. Secondly, the economic slack combined with the assumption that the budget only is valid for families who actually are living on a reasonable level of living. The implication is that this economic and material “slack” opens the opportunity for investments


6

in assets. This distinction - investment in assets and buying durable goods - is crucial. A good investment usually means increasing an asset’s (money) value in the future; residence, education, investing in children, spouse etc. Combined with a calculation on future income, this kind of investments are important for securing the family’s welfare in the future. In other words, the standard budget gives not only the family living on its consumption level an opportunity to preserve this level for the future, but also some economic opportunities for investments. The depreciation of durable goods and the subsequent “savings” are - of course - not sufficient for heavy investments as buying a house, but it contributes substantially.

The main principle underlying the minimum budget is to change the investment perspective built into the standard budget. There are – however - no rational arguments for defining a minimum level for consumption based on the assumption that all income is consumed during a short period of time, for example from one wage period to another. This would very soon end up in payment problems and poverty, or deepen the poverty level of those who are poor at the outset. Even a minimum level of consumption expenditure requires a minimum of savings.

In defining the minimum budget we suppose that the families are living on a minimum, and that this level should be maintained. The maintenance assumption is met through the calculation of daily consumption and short time savings. On the other hand, long term savings that are depreciating durable goods with long life span (for example furniture, household goods) are not included in the minimum budget. The practical implication is that families living on a minimum budget level have to reduce their short time consumption (which includes clothing, leisure activities and in some cases food consumption) in order to be able to buy households goods, for example a refrigerator. The principal argument for this is that the expenditure level for the remaining consumption is on a level that permits short time cut backs without ending in a poverty trap. The Governmental guidelines for calculating social assistance benefits The official norms for calculating social assistance are issued annually by the Ministry of Social Affairs. In existence since 2001, they are intended to serve as guidelines for the local social assistance departments. Before that time, the Ministry was reluctant to set norms because it did not want to interfere with local democracy. As a consequence there was huge variation in the amount of money social recipients received in social assistance. The Ministry (Circular 1-34/2001) stresses that the norms should merely serve as a guideline and a “tool” for calculating benefit, and that the Social Assistance Department has the right and the obligation to use professional discretion when applying the governmental norms as well as the norms issued by the municipalities (Circu1ar-34/2001). The Circular further maintains that the local social administration should always perform concrete and individual means test, and assessing the applicant’s expenditures as well as incomes, before deciding the amount of the benefit. The Circular further emphasises that social assistance should contribute to a “proper, but sober means of sustenance”/ lifestyle/way of life (“levesett”), but on the other hand the benefit should motivate the client to work, to participate in an ALMP or other activities that may enhance work (Circular 1-34/2001: Introduction).

In short then, we compare three poverty measures and the amounts of money they give rise to that differ conceptually, but that are all in use in Norway. The official income poverty definition counts people with income below a certain threshold as “poor” because they lack the means to “fulfil basic welfare needs”, or to enjoy an “acceptable” living standard. The minimum budget is built on the assumption that a household’s incomes need to be sufficient to give a sustainable financial situation, i.e. an assumption met through the calculation of daily consumption and short time savings. The rationale for the Ministry’s guidelines for minimum norms is based on the premise of what is needed to live a “proper, but sober” way


7

of life. This means that in practice all three measures are justified by reference to a certain level of consumption or living standard. They differ, however as to what the appropriate level should be, as soon will become evident.

4. Data Norway uses the OECD’s equivalence scale from 1982 to calculate equivalised household income in order to derive the poverty line. This scale assigns the weight of 1 to the first adult, 0.7 to the second and 0.5 to each child below the age of 17. The rationale for using the OECD82 scale is simply that it has a “moderate” economy of scale (St.meld. nr. 6, 2002-2003, appendix) as compared with other commonly used scales like the one used by EU and the square root scale. Income data are derived from Statistics Norway’s 2005 Income statistics which cover the entire population and are based on the tax forms. Since we are interested in the official Norwegian poverty line, we stick to the OECD82 equivalence scale. By this measure, 50 per cent of the median income in single households, i.e. “the poverty line” for an individual, was 96 000 NOK in 2005 (http://www.ssb.no/emner/05/01/ifhus/).

The minimum budget levels for different household types are based on the principles and the calculations accounted for above. The consumption categories included in the calculations are food and drinks, other daily consumption items; clothes and shoes; health and personal hygiene; leisure; media; travel and transportation. The actual costs of the defined items within each of these sectors add up to the consumer expenditure level.

The Ministry draws a distinction between the part of means of sustenance (“livsopphold”) that always should be covered by the benefit, and a part of the means of sustenance that could be met. To the “always” category belong items such as food and drinks, clothes and shoes, personal hygiene, leisure activities, travel expenses, housing, power and heating. The “could” category includes “special” costs and items such as presents and celebration of Christmas, sports and leisure equipment, equipment for infants, child care, school start, medical costs, a car, and other “special needs” (Circular 1-34/200,1: 5.1.4)2. Further, these costs are not included in the calculations of actual amounts of money the Ministry recommends. Also, the guidelines, and the sums of money they imply, are explicitly limited to short term receipt of social assistance. This means that at the outset, official guidelines includes less items and costs than the minimum budget.

The minimum budget (MB) - as well as the official guidelines (OG) - excludes housing costs. This implies that the income poverty line (IP) cannot be directly compared to the minimum budget and the official norm. In order to make IP comparable with to the two latter, we have to make some assumptions about housing costs.

It is difficult to calculate the housing cost, especially for home owners who are most common in Norway. There are several reasons for this; the size, quality and the local market prices vary considerably. In addition, the cost is dependent of the phase in the housing career. Newcomers in this market pay more in interest rates and instalment than families late in the self-owner career. Even if instalments, in economic terms, are investments, and not included in the cost of housing, the question is still; how do we assess the housing cost in the short term perspective; is instalment payments not a necessary expense that has to be prioritized against other necessary expenses? In other words; the cost structure of home owners varies according to life phase, social class and geographic localization and it is almost impossible to come up with a simple numeric expression for housing cost for home owners.

2 See also Borgeraas & Øybø (2003), for a more detail.


8

Rent rates, however, do not vary in the same way. Even if there are substantially differences in prices between local markets within the same geographical location, it seems reasonable to use the average rental costs in different regions in Norway for flats with different numbers of rooms. The cost structure is less complicated than for home owners. Even if most Norwegians own their own dwelling, the poor are more inclined to rent than other socio-economic groups (ref?). It sees more reliable to use rent prices as the estimate of housing cost; it is simpler and probably more reliable than an estimate of the housing cost for home owners. We have therefore used empirical data of rent prices from Statistics Norway. These prices vary considerably by region and number of rooms.

For our analysis this implies that we have to compare these three poverty measures for different regions in Norway. We have chosen to compare Oslo, as a representative of the big cities, with densely populated areas. These two regions constitute the extremes in the cost structure in the rent market; Oslo is the most expensive, while the densely populated areas are among the cheapest.3 As we see in table 1 and 2, the average monthly rent for a one room flat is 4 748 in Oslo and 2 805 in densely populated areas. A single person in Oslo has to pay 1 943 more per month than a single person in densely populated areas.

A rough procedure is to assume that the number of rooms are the same as number of members in the household with 4 rooms as the maximum. For households with more than 4 persons this procedure will underestimate the cost for families with many members and must be seen as a minimum. In spite of this uncertainty, this estimate is the best available. It will provide a reasonable valid basis for comparing the IP measure with the two consumption measures.

We compare figures indicating poverty calculated from the income survey, those calculated from Borgeraas and Øybø (2003), and the Ministry of Labour and Inclusion (the former Ministry of Social Affairs) that serve as guidelines for the social services in the municipalities when measuring out aid (Circular 1-34/2001, Circular U-2/2004). Comparisons are made in relative terms.

5. Results In Table 1, first column we show the income poverty lines for different types of households in 2005 ((http://www.ssb.no/emner/05/01/ifhus/). In column 4 and 5 the average for rent prices in Oslo are entered. The entries in the last column, i.e. livelihood per year, indicate the amount available for consumption after subtraction of housing costs.

3 Areas with scattered settlement have the lowest rent prices,


9

Table 1. Income poverty line (IP), housing costs in Oslo, and livelihood in different types of households. All figures pertain to 2005 Household

Type

Income

povety4

Number of

rooms

Rent

per mnth5

Rent per

year

Livelihood /

year

1 96000 1 4748 56976 39024

1+1 144000 2 6354 76248 67752

1+2 192000 3 7335 88020 103980

1+3 240000 3 7335 88020 151980

2 163000 2 6354 76248 86752

2+1 211000 3 7335 88020 122980

2+2 259000 4 8277 99324 159676

2+3 307000 4 8277 99324 207676

Table 2 Income poverty line (IP), housing costs in densely populated areas, and livelihood in different households. All figures pertain to 2005 Household

Type

IP Year6 Number of

rooms

Rent

per mnth.7

Rent per

year

Livelihood /

year

1 96000 1 2805 33660 62340

1+1 144000 2 3808 45696 98304

1+2 192000 3 4508 54096 137904

1+3 240000 3 4508 54096 185904

2 163000 2 3808 45696 117304

2+1 211000 3 4508 54096 156904

2+2 259000 4 4547 54564 204436

2+3 307000 4 4547 54564 252426

Table 2 shows the equivalent data for densely populated areas. We observe that because rent rates are lower in densely populated areas (and the IP is fixed), the people living in densely populated areas have considerable more money to spend than people living in Oslo. This

4 OECD scale, 50% of the median income. See: http://www.ssb.no/emner/05/01/ifhus/ 5 SSB: Leiemarkedsundersøkelsen 2005:39. Average numbers for Oslo 6 OECD scale, 50% of median income. 7 SSB: Leiemarkedsundersøkelsen 2005:39. Average for densely populated areas.


10

applies to all types of households. For this reason alone the application of a nationwide income poverty line is questionable.

Table 3 compares the three poverty measures. As long as the income poverty level (IP) varies geographically, this measure is compared with the two others in Oslo and densely populated areas. The minimum budget (MB) and the official guideline (OG) are defined nationally and can thus be compared directly.

If we focus on the comparisons of the poverty measures, three important findings stand out from Table 3.

Tabel 3. Poverty levels according to three poverty measures in different household types. Oslo and densely populated areas. Relative differences. 2005.

Oslo Densely populated

Household

type

MB/OG% MB/IP% OG/IP% MB/IP% OG/IP%

1 139 177 127 111 80

1+1 132 159 120 109 83

1+2 130 141 109 106 82

1+3 129 123 95 100 78

2 149 142 95 105 70

2+1 142 132 93 103 73

2+2 138 127 91 99 71

2+3 136 116 86 96 70

First, turning to MB compared with the official guideline (OG), a conspicuous and consistent feature is that the MB levels by far exceed the levels of the OG. Since none of these concepts include housing costs, the figures are identical for the two areas. The percentages fluctuate quite a lot depending on the type of household in question: For adult couples the MB level is 49 per cent higher than that of IP. For one adult and three children, the MB level is 29 per cent higher than the IP level.

Secondly, in most cases SIFO’s minimum budget standard (MB) has, as compared with the income poverty level (IP), a higher level of livelihood. The relative disparities vary, however, quite a lot by household composition and area of residence. The differentials are largest in Oslo for single households and households including one adult and one child. The differences between IP and MB are – of course – smallest in densely populated areas because housing costs are lower here. In fact in these regions the MB level is lower than IP for couples with two and couples with three children.


11

Thirdly, the official guidelines (OG) turn in most cases out to be lower than the income poverty level (IP). The exceptions are found in Oslo for three household types: single adults, single adults with one child, and single adults with two children. Else, the OG level is from five per cent to 27 per cent lower than the IP level. Hence, the local social assistance departments that adhere to the official guidelines will often offer a sum of money which is lower than the level of the official income definition of poverty. This means that recipients of social assistance receiving the recommended minimum level will be living in poverty, and some households (couples and couple with children in densely populated areas) will have to accept a level quite far below the income poverty line.

6. Discussion

In this paper we have identified, defined, operationalised, calculated and compared three different measures of “poverty” in Norway: income poverty and two measures of a minimum budget standard, one scientifically and one politically defined. The three measures rest on different underlying concepts and serve different purposes. The official income poverty (IP) definition assumes that people with income below a certain threshold do not have the means to fulfil basic welfare needs, or to enjoy an “acceptable” living standard. The minimum budget (MB) rests on the assumption that a household’s incomes need to be sufficient to give a sustainable financial situation in the longer run, an assumption met by calculating a sum of money which covers daily consumption costs as well as some savings. The third, i.e. Ministry’s official guidelines (OG) for minimum norms prescribe the amounts needed to achieve a “proper, but sober” way of life. Our comparisons of the “poverty lines” these three measures give rise to show that the MB measure gives higher amounts of money than the IP definition, which, in turn is clearly higher than the OG level. One important point is that if followed, the governments’ official guidelines will not raise beneficiaries of social assistance above the income poverty level adopted by the same government. IP compared with OG At first glance it seems like a contradiction that the government has declared that poverty shall be eradicated in Norway, while at the same time setting the social benefit norms so low. The chief means to eradicate poverty in Norway is to assist, motivate, stimulate and require people to become self-sufficient through ordinary work. There is a political consensus that work is the major strategy to combat poverty and long-term receipt of social assistance. At the same time, a common view is that benefits and packets of benefits should be targeted and calibrated so that they provide incentives to work. Another issue is that the governmental apprehension of income poverty is that it is by definition long-term, i.e. lasts at least three years. However, when the same government defines and calculates OG, social assistance is by definition short-term. It is as if income poverty, in order to be acknowledged as “poverty”, has to be long-term. However, for social assistance receipt to be acknowledged, it is required to be short-term. It is not easy to detect the logic in this.

IP compared with MB The problem with IP, as argued earlier, is that it is strictly formal. Variations in expenses, with an exception of equivalence scales, are only indirectly accounted for in IP. We do not know if individuals living on this level have unacceptable living conditions because we do not know their actual level of living/living standard. Introducing housing costs IP become even more difficult to interpret in terms of living conditions; does it cost 25 % more to avoid poverty in densely populated areas than in Oslo? There are no or little evidence that this is the


12

case. The principal argument is, however, that IP is not concerned with expenses, only with income. On the other hand, MB is constructed as a consumption expenditure measure, which means that income – in principle - is a dependent variable. Both the IP and the MB has a longer time perspective built into them. Seen in this perspective one may say that the significant discrepancies between the two measures are somewhat surprising. Since the IP measure basically is arbitrary and rests on international, i.e. European conventions with little empirical substantiation, the justification of this measure is weak. The comparisons of IP with MB therefore suggest that the official governmental income poverty line is set too low, especially in Oslo. It should be remembered that in the EU the relative income poverty line in each member state is drawn at 60 % of the median, and not at 50 % like in Norway. Under this perspective, this analysis may be seen as a way of validating the income poverty measure. In the long run incomes on this level will exhaust the household’s economic resources, and may lead to stripping of its assets. After all, our MB is the measure that is best evaluated and justified of the three measures, although it is far from perfect.

MB compared with OG The differences between these two poverty measures are related to the fact that the OG does not include items that MB does include, and OG assumes lower cost estimates of the items both measures include. It is quite remarkable that the MB and the OG yield so different amounts, the former lying between 47 and 28 per cent above the latter. It is reasonable to relate these differences to important conceptual distinctions between the two measures. First, the depreciation, or more principally the time horizon, differs between the two concepts. The items built into OG have no lifetime. It is, more or less, taken for granted that recipients of social assistance have some durable goods, but it does not assume that recipients need to buy most of the durable goods. It is, for example, assumed that social assistance covers TV license, regular telephone fees, but it is not assumed that the recipients need to buy a new TV or a telephone. Moreover, MB includes more items than does OG. PC, internet costs, printers, mobile phones – both their use and depreciation – are all included in MB but not in OG. The question as to what should be included in the minimum budget and to what price and quality will ultimately lean on normative arguments. However, when the minimum budget includes costs for PC and internet it is because access to these goods must be seen as a social necessity in post-industrial society. For example, in many schools today, young students download their assignments from, and submit their homework on the internet. Under the broader aim of social inclusion it is therefore hard to reject that such goods are social necessities. EU has acknowledged this while including internet access as one of a wide range of indicators of social exclusion. A second feature underlying the OG is that “work should pay”, a view shared by most political parties in Norway. The principle requires that social assistance benefit should not exceed the lowest wages in the labour market. Two justifications are invoked for this principle. First, the income maintenance system must provide work incentives, and second, if benefits are higher than the lowest wages, the moral fabric of the society is challenged and so is the legitimacy of social assistance. However, emphasising these consequences, must not lead one to disregard other important consequences also. The comparisons of MB and OG also suggest that individuals and families living on these official norms will exhaust their resources after some time, since the minimum budget is not a sustainable long term budget.

7. Theoretical assumptions and social reality Let us now turn to some more substantial, empirical and political ramifications of our analysis. Answers to three empirical questions are crucial to assess the low benefit level


13

recommended by OG. Do low benefits encourage work? Do ALMPs lift poor and long term social assistance recipients out of poverty and into work? Finally, is no one living on social assistance for extended periods of time in Norway? The shorthand response to the first is that no unequivocal answer may be given. Yet, decent benefits may be a prerequisite for recipients to achieve self-sufficiency through ordinary work. Comparative evidence from different social assistance regimes in Europe indicates that harsh means-testing may function as “asset stripping” and might complicate rather than facilitate the route (back) to work (Saraceno 2002). To the second question: The arguments put forward by the political establishment by and large hinges on the assumption that active labour market programs work for the most disadvantaged, i.e. the long term poor and social assistance recipients. Evidence is now accumulating which clearly indicates that these programs are not helpful for these vulnerable groups (Lorentzen and Dahl 2005). The answer to the third question is that a significant proportion of social assistance recipients receives benefit continuously for several years, or appears as recidivists (Dahl and Lorentzen 2003, Frisch 2004). For some, social assistance is the main source of income over extended or recurrent periods of time. This is against the intentions of the social assistance system, but is nonetheless a reality which should be reflected in the design of social policy and benefit levels. According to our analysis and the justification underlying the minimum budget, if these people have to live on the OG for years, they will inevitably exhaust their financial resources. One consequence is a gradually deteriorating standard of living. An equally important consequence, from the perspective of the Work Approach, is that if people become stripped of assets in the long run, their possibility to get back to work may be severely hampered. In light of this knowledge, the arguments favouring low assistance norms are not tenable. The view that social assistance is (assumed to be) short term is contradicted by empirical evidence. In the Circular (5.1.5.1) the Ministry does not accept responsibility for long term needs among social assistance recipients. The Circular simply states that regarding long term recipients some may be in need of financial assistance for renewal of household contents and white goods. In light of available evidence the official guidelines should be revisited. Effective combat of long term poverty and receipt of social assistance must also include decent income support of some sort.

References

Atkinson, T, Cantillon, B, Nolan, B (2001), Indicators for social inclusion in the European Union Atkinson, T., B. Cantillon, E. Marlier, B. Noland (2002): Social Indicators: The EU and Social Inclusion, Oxford University Press

Borgeraas and Øybø (2003): Minstestandard for forbruksutgifter. SIFO. Oppdragsrapport nr. 8-2003. Bradshaw, J. (2001): The measurement of absolute poverty, pp105-139 in Schokkaert, E. (ed.), Ethics and Social Security Reform, International Studies on Social Security, Ashgate: Aldershot

Collette, J.M. (2000): “Empirical Inquiries and the Assessment of Social Progress in Western Europe. A Historical Perspective.” Social Policy and Development Programme Paper PP-SPD-3. Geneva:UNRISD.


14

Cooter, R. & P. Rapport (1984): Were the Ordinalists Wrong About Welfare Economics? Journal of Economic Literature, vol. XXII, June Dahl, E. and Lorentzen, T. (2005): What works for whom? An analysis of active labour market programmes in Norway, International Journal of Social Welfare 14, 86-98.

EU (2003): Joint Report on Social Exclusion 2003

Fisher, G. (1992): The Development and History of the Poverty Thresholds. Social Security Bulletin. Vol. 55, no.4. Glennester, H. (2000): Us Poverty Studies and Poverty Measurement: The past twenty-five years. CASEpaper 42 October. Centre for Analysis of Social Exclusion, London School of Economics. Gulbrandsen L. og A. West Pedersen (2003): Bostøtte og boutgifter. NOVA Rapport 19/2003. Langsether Å. og P. Medby (2004): Husleieindeks og husleiestatistikk, Rapporter, 10, NOVA. Lorentzen, T. and Dahl, E. (2005), ‘Active labour market programmes in Norway: are they helpful for social assistance recipients?’ Journal of European Social Policy, 15: 1, 27-45. Lødemel, Ivar. 2005. Workfare: Towards a New Entitlement or a Cost-cutting Device Targeted at Those Most Distant from the Labour Market? Dice Report. Volume 3 no 2. Center for Economic Studies and the Ifo. Institute for Economic Research. Munchen.

Ministry of Social Affairs (2001) Rundskriv 1-34/2001. Oslo: Ministry of Social Affairs.

Ministry of Social Affairs (2004) Tilleggsrundskriv U-2/2004. Oslo: Ministry of Social Affairs.

Orchansky, M. (1965): Counting the Poor: Another Look at the Poverty Profile. Social Security Bulletin, January.

Ringen, Stein. (1995): Well-being, measurement, and preferences. Acta Sociologica. Vol. 38:3-15 Rowtree, S. (2000): Poverty: A Study of Town Life. Centennial Edition. The Polity Press, Bristol.

Saunders, P. (1999): Budget Standards and the Poverty Line. The Australian Economic Review, Vol. 32, no. 1

Sosial- og helsedirektoratet (2004): Sammenfatning av forskning om standardisering av økonomisk sosialhjelp ved bruk av statlige retningslinjer og kommunale normer. Rapport Oslo: Sosial og helsedirektoratet.

Statistics Norway (2004) Statlige retningslinjer

Statistisk Sentralbyrå (2005): Leiemarkedsundersøkelsen 2005. Rapport 2005/32

Stortingsmelding nr. 6. Tiltaksplan mot fattigdom.

Veit-Wilson, J (1998) Setting adequacy standards. How Governments define minimum incomes. Bristol: The Policy Press.


15

Attachment

Table A1. Income poverty line (IP), housing costs in Oslo, and livelihood in different types of

households. All figures pertain to 2005

Household

Type

Income

Povety8

Number of

Rooms

Rent

per mnth9

Rent per

year

Livelihood /

year

1 96000 1 4748 56976 39024

1+1 144000 2 6354 76248 67752

1+2 192000 3 7335 88020 103980

1+3 240000 3 7335 88020 151980

2 163000 2 6354 76248 86752

2+1 211000 3 7335 88020 122980

2+2 259000 4 8277 99324 159676

2+3 307000 4 8277 99324 207676

Table A2 Income poverty line (IP), housing costs in densely populated areas, and livelihood in different household. All figures pertain to 2005 Household

Type

IP Year10 Number of

rooms

Rent

per mnth.11

Rent per

year

Livelihood /

year

1 96000 1 2805 33660 62340

1+1 144000 2 3808 45696 98304

1+2 192000 3 4508 54096 137904

1+3 240000 3 4508 54096 185904

2 163000 2 3808 45696 117304

2+1 211000 3 4508 54096 156904

2+2 259000 4 4547 54564 204436

2+3 307000 4 4547 54564 252426

8 OECD scale, 50% of the median income. See: http://www.ssb.no/emner/05/01/ifhus/ 9 SSB: Leiemarkedsundersøkelsen 2005:39. Average numbers for Oslo 10 OECD scale, 50% of median income. 11 SSB: Leiemarkedsundersøkelsen 2005:39. Average for densely populated areas.


16

Table A3 “Poverty” levels according to three poverty measures in different household types. Relative differences. Oslo

Household

type

Income

Poverty

(IP)

Minmum

Budget

(MB12)

Official

Guidelines

(OG13)

MB/IP/% MB/OG% OG/IP%

1 39024 68640 49680 176 138 127

1+1 67752 106740 81360 158 131 120

1+2 103980 145560 113040 140 129 109

1+3 151980 185580 144720 122 128 95

2 86752 121440 82560 140 147 95

2+1 122980 160260 114240 130 140 93

2+2 159676 200280 145920 125 137 91

2+3 207676 239100 177600 115 135 86

Table A4 “Poverty” levels according to three poverty measures in different household types. Relative differences. Densely populated areas.

Household

type

Income

Poverty

(IP)

Minmum

Budget

(MB14)

Official

Guidelines

(OG15)

MB/IP/% MB/OG% OG/IP%

1 62340 68640 49680 110 138 80

1+1 98304 106740 81360 109 131 83

1+2 137904 145560 113040 106 129 82

1+3 185904 185580 144720 100 128 78

2 117304 121440 82560 104 147 70

2+1 156904 160260 114240 102 140 73

2+2 204436 200280 145920 98 137 71

2+3 252426 239100 177600 95 135 70

12 In one person households and single parents the adult is a woman. For two parent households there are one man and one woman. All children are females between 11 – 14 years. 13 http://www.odin.asap-asp.com/aid/norsk/dok/andre_dok/rundskriv/044031-250014/dok-bn.html 14 In one person households and single parents the adult is a woman. For two parent households there are one man and one woman. All children are females between 11 – 14 years. 15 http://www.odin.asap-asp.com/aid/norsk/dok/andre_dok/rundskriv/044031-250014/dok-bn.html


17

inequality12- Borgeraas

Documents

Transcript of inequality12- Borgeraas