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Low Income in Canada: 2000-2007 Using the Market Basket Measure - August 2009

2. Low Income Measures: Conceptual Differences

Approaches to measuring low income fall into two broad categories. The first measures individual or family income against a fixed percentage of the average or median income of other individuals or families with similar characteristics. This is commonly referred to as a «relative approach». The second, or «absolute» approach, is based on whether an individual's or family's income is below the cost of a specific basket of goods and services.

Of the three low income measures most commonly used in Canada, the Low Income Measure (LIM) and the Low Income Cut-offs (LICOs) adopt a relative approach while the Market Basket Measure (MBM) adopts an absolute approach.

2.1  The 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 twenty percentage points higher than the average family. Until 1971 the Low Income Cut-offs were calculated only 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 the deduction of 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 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 twenty percentage points higher than the average family in that year on food, clothing and shelter (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 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 twenty percentage points higher than average families of the same size living in the same broad community size did in 1992?

The LICOs-IAT are based on average consumption patterns and thus are relative in concept. However, they are not a pure «relative» measure of low income in application since they remain constant in 1992 real dollars 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 and shelter. (See Appendix A for a detailed description of the LICOs-IAT).

2.2 The 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 Footnote 7 very similar to that of the LIM-IAT.

2.3 The Market Basket Measure (MBM)

The MBM was developed in response to a request in 1997 from the Federal, Provincial and Territorial Ministers responsible for Social Services by a Federal-Provincial-Territorial Working Group on Social Development Research and Information. Ministers wished to supplement the existing Statistics Canada measures of low income with a measure based on the cost of a specific basket of goods and services which would be sensitive to differences in the cost of the basket between similar sized communities in different provinces and between different geographical regions within provinces. The development of the MBM involved significant consultations with government departments, academic experts, non-governmental organizations and advisory bodies as well as Statistics Canada.

Statistics Canada, on Human Resources and Skills Development Canada's behalf, collects the data on the cost of goods and services in the basket to calculate thresholds for 19 specific communities and 29 community sizes in the ten provinces Footnote 8.

In both concept and application, it is a goods and services or «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. Footnote 9

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.

  • 7 An equivalence scale adjusts household or economic family disposable income before determining the median level of adjusted income. It takes into account the fact that larger family units can realize economies of scale for items of expenditure such as housing. In the LIS disposable household income is divided by the square root of the number of persons in the household. In the LIM-IAT economic family post-income tax income is divided by the sum of the weights given to each family household member. The first adult in the family is counted as 1; the second and all subsequent adults are counted as 0.4; the first child under age 16 in a lone parent family is also counted as 0.4. All other children are counted as 0.3. Thus our MBM reference family of two adults and two children would have a weight of 1+0.4+0.3+0.3=2.0. This means its post-income tax income would be divided by 2 before being put into the distribution to determine median adjusted post-income tax income. The LIS uses the same factor of 2 for such a family because 2 is the square root of 4. For families of up to four persons the factors are almost identical for the LIM-IAT and LIS equivalence scales. Return to reference 7
  • 8 The income data for this report are from Statistics Canada's Survey of Labour and Income Dynamics (SLID) which is currently not administered in Nunavut, the Northwest Territories and the Yukon. Consequently, Statistics Canada is not currently able to provide reliable income estimates for persons living in these three jurisdictions. Nor is it able to produce reliable estimates for the costs of some components of the MBM basket in these jurisdictions. For these reasons data cannot yet be produced for the Territories. Return to reference 8
  • 9 Examples of such services would be rent-geared-to-income housing and food, clothing or transportation provided by charitable institutions or relatives or friends. Return to reference 9

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Date Modified:
2011-12-14