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Poverty Methodology

This section aims to explain the terminology, definitions and methodology used to calculate the official income measures.

The links on the left direct users to information on definitions and confidence intervals around the poverty estimates.

What is poverty: Definitions

Official income and low income estimates are calculated using the Department for Work and Pensions' (DWP) Family Resources Survey (FRS) information.

Low income is used as a proxy for poverty, with individuals being defined as in low income poverty if their equivalised household income is below a specified threshold.

This section aims to explain the terminology, definitions and methodology used to calculate these official income measures.

A brief overview of how poverty is measured by the Scottish Government is available here: What is poverty?

Sources

There are a variety of sources of income data. The official source for income statistics for Scotland is the Department for Work and Pensions' ( DWP) Family Resources Survey ( FRS). For low income analyses the DWP derive the Households Below Average Income ( HBAI) dataset.

The FRS is an annual survey which provides snapshot ('Total') income estimates and is usually published in the Spring by the DWP. Since 2002/03 the Scottish Government have paid for a doubling of the FRS sample for Scotland to around 2,700 household interviews. This has enabled more detailed analysis of the Scottish data, and in particular more robust low-income estimates.

The FRS derived HBAI dataset is used to provide income analysis under all the various income measures and for the official snap shot low income estimates for individuals, children, working age adults and pensioners in Scotland.

For more detail about the various data-sources which may be useful to statistical users interested in income and poverty issues please see the Data Sources and Suitability section.

Definitions

Gross/Total household income: Total income from all sources including from Tax Credits, before deductions of income tax and National Insurance.

Net household income: Gross / total income after deductions for income tax and National Insurance contributions.

Net disposable income before housing costs: Net household income (as above) but after deductions for council tax, pension contributions and maintenance payments.

Net disposable income after housing costs: Net disposable income before housing costs (as above) but after deductions for housing costs - i.e. rent / mortgage interest payments, structural insurance premiums, water charges, ground rent and service charges.

Equivalised net disposable household income: Equivalised income is household income which is adjusted by using an equivalence scale to take into account the size and composition of the household.

Absolute low income: 60% of the UK/GB equivalised net disposable household income ( BHC and AHC) median in a base year, which has been adjusted to remove the effects of inflation. This measure shows whether those in the lowest income households are seeing their incomes rise in real terms.

Relative low income: 60% of the UK/GB equivalised net disposable household income ( BHC and AHC) median in the same year. This measure demonstrates whether those in the lowest income households are keeping pace with the growth of incomes in the economy as a whole.

Median: The income value which divides a population, when ranked by income, into two equal-sized groups. This measure is most commonly used to represent average income due to the highly skewed nature of the income distribution, which leads to the very high incomes of a few having a disproportionate impact on the mean.

Mean: The total income of all households in a population, divided by the number of households. In some situations it can be more appropriate to use the mean rather than the median.

Quintiles: Quintiles are income values which divide the population, when ranked by income into five equal-sized groups.

Gini Coefficient: A widely-used summary measure of inequality. It can range between zero and one hundred, where a value of zero would indicate total equality, with each household having an equal share of income, while higher values indicate greater inequality. A value of one hundred would mean total inequality.

Equivalisation

Equivalisation

Most official income and poverty measures use household income as a proxy for standard of living. However, households of different sizes and compositions require a different level of income to achieve the same standard of living. For example, a one adult household clearly does not require as much income as a two adult household in order to attain an equivalent standard of living, but the income required would not be half that of the two adult household.

Because of this an adjustment, known as equivalisation, is made to household incomes which attempts to account for the different needs of different sized households. Equivalised household income is designed to be comparable across households of different sizes.

Equivalence scales: rationales, uses and assumptions

There are a number of different equivalence scales which can be used to equivalise household incomes. Since 2007 UK and Scottish Government official poverty estimates have been based on the Modified OECD scale.

The following paper discusses some common equivalence scales and issues around some of the underlying assumptions of the equivalisation process. It aims to answer the following questions:

  • How was the OECD modified equivalisation scale arrived at? What factors were considered in its creation? What factors were considered in its acceptance by Eurostat?
  • What other equivalisation scales are available? What are their main characteristics and differences compared to the modified scale, and who uses them?
  • Does use of the OECD modified equivalisation scale overestimate the standard of living achieved by disabled people and the families of disabled people?
  • Is the assumption that income is shared equally amongst all members of the household a fair one?

Full report here: Equivalence scales: rationales, uses and assumptions

For further information please see Appendices 2 and 3 in 'Households Below Average Income 1994/95-2004/05' [2]. This is a DWP publication and provides further details on the equivalisation methodology.

Measuring low income

The most commonly used low income threshold for being in low income is 60% of the median.

In order to determine if an individual is in low income their equivalised net disposable household income before and after housing costs must be calculated and compared with the average for the whole population. Individuals are then defined as being in low income poverty if their equivalised household income is below a specified threshold.

Please note again that it is household income rather than individual income that is used because the living standard of an individual may depend on the income of other members of the household (say for example a non-working person may live with a high earning partner, with both having a high standard of living). A key assumption therefore is that all individuals in the household benefit equally from the combined income of the household.

Which average - why median rather than mean?

The median is the income value which divides a population, when ranked by income, into two equal sized groups. This measure is most commonly used to represent average income due to the highly skewed nature of the income distribution that can lead to the very high incomes of a few having a disproportionate impact on the mean.

 

Low income trends - the absolute and relative low income measures

To define and measure those living in low income over time there are two headline measures - relative and absolute low income households.

The relative low income measure compares against the median in the same year.
The absolute measure compares against the median in a baseline year, adjusted to remove the effects of inflation.

In essence, the absolute measures whether individuals in the lowest income households are seeing their incomes rise in real terms. The relative measures whether those in the lowest incomes are keeping up with the growth of incomes in the the economy as a whole.

Absolute low income:

Individuals living in households whose equivalised income is below 60% of inflation adjusted UK median income in 2010/11. This is a measure of whether those in the lowest income households are seeing their incomes rise in real terms.

Relative low income:

Individuals living in households whose equivalised income is below 60% of UK median income in the same year. This is a measure of whether those in the lowest income households are keeping pace with the growth of incomes in the economy as a whole.