Low Income in Canada: 2000-2006 Using the Market Basket Measure - October 2008

2. Low-Income Measures: Conceptual Differences

Approaches to measuring low income fall into two broad categories. The first is based on the number of persons living in families whose incomes are below the cost of a specific quantity and quality of goods and services. The second is based on the number of persons living in families whose incomes fall below some fixed percentage of the average or median level of income for their family size and configuration. This is commonly referred to as a "relative approach."

There are three commonly used low income measures in Canada: Statistics Canada's Low Income Cut-offs and its Low Income Measure, and the Market Basket Measure.

2.1 Low Income Cut-offs (LICOs)

Low income measurement in Canada began with the creation of the Low Income Cut-offs in the early 1960s to analyze income data from the 1961 Census. These are based on the income levels at which a given family size in a given community size is likely to spend a share of its income on food, clothing and footwear, and shelter which is 20 percentage points higher than the average family. Until 1971, LICOs were calculated for the share of pre-tax income spent on these three categories of expenditure. Beginning in 1971, they have also been calculated for the share of income, after deducting income taxes, spent on these categories.

The post-income tax Low Income Cut-offs (LICOs-IAT) are the most commonly used measure of low income in Canada and the measure highlighted by Statistics Canada in its annual report, Income in Canada.

Currently, the cut-offs are set based on 1992 expenditure patterns. Cut-offs are set at income levels where a family would spend a share of its post-income tax income 20 percentage points higher than the average family on food, clothing, and shelter in that year (63% as opposed to 43% for the average family). These cut-offs are calculated for seven different economic family sizes (one through six and seven or more) and for five different community sizes (rural, urban under 30,000, urban between 30,000 and 99,999, urban between 100,000 and 499,999, and urban 500,000 or more to take into account the fact that shelter costs tend to rise with the size of the community). The cut-offs are indexed for inflation for all other years using the national Consumer Price Index.

The LICOs-IAT thus answer the question: How many Canadians live in families spending a share of their total post-income tax income on food, clothing and footwear, and shelter 20 percentage points higher than did average families of the same size living in the same broad community size in 1992? The LICOs-IAT are based on average consumption patterns in 1992 and thus are relative in concept. However, they are not a pure "relative" measure of low income in application, since they remain constant in real terms through being annually indexed to the national Consumer Price Index rather than being adjusted annually for changes in the share of post-income tax spending on food, clothing, footwear and shelter. (See Appendix A for a fuller description of the LICOs-IAT.)

2.2 Low Income Measure (LIM)

In an attempt to develop a purer relative measure of low income, Statistics Canada developed the Low Income Measure in 1991. The post-income tax Low Income Measure (LIM-IAT) sets its thresholds at one-half of median post-income tax income adjusted for the number of adults and children in the family. The LIM cut-offs are not adjusted for differences in community size. The threshold for a family of any given configuration is the same regardless of the size of their community. It is automatically adjusted each year for changes in median family post-income tax income levels, adjusted using its equivalence scale.

The LIM-IAT thus answers the question: How many Canadians have a post-income tax income lower than 50% of the adjusted median post-income tax income for all Canadian families in a given year?

The LIM-IAT is very similar to the Luxembourg Income Study measure of low income (LIS) which is often used for international comparisons of relative low income. The LIS thresholds are based on half of median adjusted household disposable income (income after deducting payroll as well as income taxes) in the country being examined and have an equivalence scale ⁷ very similar to that of the LIM-IAT.

2.3 Market Basket Measure (MBM)

The history of the development of the MBM is described in Section I. In both concept and application, it is a "goods and services" (absolute) rather than a "relative" measure of low income. The MBM estimates the cost of a specific basket of goods and services, assuming that all items in the basket are entirely provided for out of the spending of the family. This cost would be lower, for example, for those families who meet all or part of this standard of consumption through direct services provided by governments, other institutions, or other families.⁸

As described in more detail in Appendix A, the components of the MBM basket have been designed to represent a standard of consumption which is close to median standards of expenditure for food, clothing and footwear, and shelter and somewhat below that standard for other categories of expenditure.

The purpose of the MBM is to provide another perspective on low income in Canada to complement the post-income tax Low Income Cut-offs (LICOs-IAT) and the post-income tax Low Income Measure (LIM-IAT). It is not an official poverty line, nor was it designed for determining eligibility for government programs or services. (See Appendix A for a more detailed description of all three of these Canadian low-income measures.)

The use of the MBM along with other tools to assess low income recognizes that no single indicator can shed light on all the questions of interest for policy analysis in this area. Together they provide a more comprehensive portrait of low income in Canada than any of them could do alone.