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

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Appendix A

Methodological Annex

In addition to the MBM there are two other commonly used Canadian low income measures developed by Statistics Canada. The value added by the MBM can best be understood by comparing and contrasting it with those measures.

The Low Income Cut-Offs (LICOs)- Pre and Post-Income Tax

The pre-income tax version of the LICOs represents a level of total income before the payment of income taxes at which, for a family of a given size and living in a rural or urban community of a given population level, the share of that income it would spend on food, clothing and footwear and shelter is twenty percentage points above that spent by the average family on these three categories of expenditure.

The income levels at which this occurs are calculated using econometric regressions for five different community sizes and for economic families ranging from one person to seven or more persons, producing thirty-five different low income cut-offs in all. ^{Footnote 29}

The post-income tax LICOs are explained in footnote 28. The current LICOs (both pre and post-income tax) are based on 1992 expenditure patterns. They are updated each year to take into account changes in the Consumer Price Index for Canada.

The LICOs thus answer the question: How many Canadians live in families spending a share of their total pre or post-tax income on food, clothing and shelter twenty percentage points higher than average families of the same size living in the same broad community size in 1992? ^{Footnote 30}

The post-income tax Low Income Measure is 50% of median adjusted family income using a post-income tax definition of income.

The word «adjusted» means that median family post-income tax income is calculated in such a way as to take into account the fact that families of different sizes and compositions have different needs.

The way in which this is done is as follows: First, factors are assigned to each family member using an equivalence scale. In this scale the oldest person in the family receives a factor of one, the second oldest person in the family and all other family members aged 16 and over each receive a factor of 0.4 and all other family members under the age of 16 receive a factor of 0.3.

Next, the values for each person in the family are added to determine the adjusted family size. The income of the family after the payment of income taxes is then divided by this sum. For example a couple with two children under age 16 would have an «adjusted family size» of 2 (1+0.4+0.3+0.3) and its total income would be divided by two. Single adults living alone would have an «adjusted family size» of one.

This equivalence scale thus assumes that the family of four requires twice as much post-income tax income to meet its household needs as an unattached adult living alone.

The median adjusted post-income tax family income is then determined. This is the level of adjusted post-income tax family income such that half of all families will be above and half below it.

The post-income tax LIM for an unattached individual is 50% of this amount. The LIMs for all other family configurations are equal to this amount multiplied by their «adjusted family size.» Thus a couple with two children would have a low-income cut-off twice that of a single adult living alone.

The Market Basket Measure (MBM)

Unlike either the LICOs or the LIM-IAT, the MBM is based on a specific basket of goods and services.

The cost of the goods and services in the MBM is calculated for a reference family of one male and one female adult aged 25-49 with two children, a girl aged 9 and a boy aged 13. ^{Footnote 31} Despite recent trends showing an increasing share of persons living in alternative household configurations (such as childless couples, lone parent families and as unattached individuals), the two-parent, two-child household is still the household type containing the largest share of Canada's population.

The cost of the goods and services in the «Market Basket» for all other household configurations is then calculated using the Low Income Measure equivalence scale (See the section on the LIM-IAT for a description of this scale).

For household sizes up to four, this equivalence scale is almost identical to that used to calculate the relative measure of disposable income poverty used by the United Nations and the Luxembourg Income Study (LIS). Their equivalence scale is simply the square root of household size.

This equivalence scale is not only used by the Luxembourg Income Study, but also by the Organization for Economic Co-operation and Development in its studies of income inequality and poverty. ^{Footnote 32}

The choice of the LIM equivalence scale is thus consistent with international practice, while reflecting judgements made by Statistics Canada in the Canadian context.

Distinctive Features of the MBM

The MBM is thus a «goods and services» measure whose cost is calculated for a number of specific urban communities and community sizes across Canada. As such, it can be used to answer a question not addressed by either the LICOs or the LIM-IAT: How many people in Canada live in families which lack the disposable income to purchase the goods and services in the «Market Basket» within their community or community size?

A second feature of the MBM is that it is more sensitive than either the LICOs or the LIM-IAT to differences in living costs among different communities and community sizes across Canada. This is because the thresholds based on the measure vary with the cost of the goods and services in the basket, not only between community sizes, but between communities of similar size in different provinces.

This sensitivity to geographical differences in living costs and the specific nature of the goods and services in the Market Basket were the features sought by the Ministers responsible for Social Services in commissioning the development of this new low-income measure.

Finally, the basic concept of low income underlying the MBM is being unable to purchase the goods and services in the Market Basket. This implies that the income to be compared to the thresholds should not be gross income, but a measure of the disposable income actually available to purchase these goods and services.

Thus, the following deductions are made from total family money income before comparing it to the cost of the basket:

• out-of-pocket spending on child care ^{Footnote 33}
• out- of- pocket spending on non-insured health care costs recommended by a health professional such as prescription drugs, health insurance premiums, aids for persons with disabilities and dental and vision care
• personal income taxes and the personal portion of all payroll taxes such as Canada/Quebec Pension Plan contributions and Employment Insurance premiums
• alimony and child support payments made to another family
• all mandatory payroll deductions for employer-sponsored pension plans, union dues and employer-sponsored supplementary health care plans.

Expenditures on support payments, out-of-pocket child care expenses and mandatory payroll deductions other than EI premiums and C/QPP contributions are derived from responses to questions on Statistics Canada's Survey of Labour and Income Dynamics (SLID).

C/QPP contributions and EI premiums were calculated based on earnings and published contribution rates. Public health insurance premiums were based on provincial contribution schedules and net income.

For those who reported positive direct out-of-pocket medical expenses on line 330 of the income tax form this amount was used. ^{Footnote 34} Otherwise they were imputed for each province from data from the Survey of Household Spending (SHS).

All these deductions represent income that is not available to purchase the goods and services in the basket. This is a much more stringent concept of disposable income than that used for either the pre-income tax LICOs (which make no deductions from total money income before comparing that income to the LICO thresholds) or the LICOs-IAT and LIM-IAT (which deduct only income taxes paid before comparing adjusted post-income tax family income to the LIM-IAT and LICOs-IAT thresholds).

Thus even where the MBM threshold for a given family in a given community is lower than that calculated using the LICOs or the LIM-IAT, that family's MBM disposable income may fall under the MBM threshold even though its total or post-income tax income may exceed the thresholds for the other two measures. Such a family would be counted as part of the low income population using the MBM but not as low income using the other two measures.

THE COMPOSITION OF THE MBM BASKET

a) Food

The content of the food component of the MBM basket is as described in the Health Canada publication, National Nutritious Food Basket 1998, written by Judith Lawn. ^{Footnote 35} The basket represents community standards of food expenditure in Canada as derived from Statistics Canada's Survey of Family Food Expenditure in Canada 1996 adjusted to be consistent with Health Canada's Nutrition Recommendations and current guidelines for fat and saturated fat intake for adults.

It is neither «an ideal diet» nor the cheapest diet which meets nutritional requirements. Instead, it represents a nutritious diet which is consistent with the food purchases of ordinary Canadian households. It contains healthy foods that «people like to eat.» It is designed to be «socially acceptable and contain sufficient variety to be nutritionally adequate and palatable over the long term.» It includes more costly «basic processed foods such as yogurt or bread…since a family would not normally prepare those foods from raw ingredients.»

The publication lists the amount of each type of food that would be purchased each week and the suggested purchase unit for the reference family. From these tables Statistics Canada was able to determine the annual cost of the food basket in the forty urban centres where it collects food price data. ^{Footnote 36}

For example, in Ottawa in January of 2000 the average price for the standard quantity of 2% milk (a four litre bag) for the reference family was $3.49. Since the Nutritious Food Basket recommended an average weekly purchase of 10.45 litres, the weekly cost of milk for the family was (10.45 litres/4.0 litres) x $3.49 = $9.12. This same procedure is followed for all the items in the food basket each month in each year and the total average weekly cost for the twelve months is multiplied by fifty-two to obtain the annual cost.

The content of the food component of the MBM is provided in Appendix B, including the suggested purchase unit and the weekly quantities of food purchased.

The annual cost of each of the five components of the MBM basket for the nineteen urban areas and twenty-nine community sizes where a threshold for the reference family was calculated is provided in Appendix G.

The cost of the food component of the MBM for the reference family in 2007 ranged from $6,574 in Hamilton, Ontario to $8,347 in Newfoundland and Labrador outside the St. John's Census Metropolitan area. The median expenditure on food by the reference family in 2007 (including food purchased in restaurants) was $9,250. Thus, the cost of the MBM food component ranged from 71.0% to 90.2% of this national median level.

b) Clothing and Footwear

In 1997, Winnipeg Harvest and the Winnipeg Social Planning Council developed a budget guide for families in the Winnipeg Census Metropolitan Area which they named the Acceptable Level of Living (A.L.L). In 1999, the Federal-Provincial-Territorial Working Group on Social Development Research and Information chose the clothing and footwear component of the A.L.L. for the MBM because it:

• was the most recent clothing and footwear «basket» developed in Canada;
• reflected an effort to provide clothing and footwear for common work, school and social occasions, a standard similar to that aimed for by the MBM; and
• had significant input from low-income persons.

The reasons why the A.L.L. clothing and footwear component could serve only as an interim specification are as follows:

An alternative clothing and footwear component has been developed that is based on the A.L.L. clothing and footwear component, but is more specific in describing the quantity and quality of the items listed and uses a different replacement schedule. The content of the items of clothing and footwear comprising this component of the basket and their replacement schedule are provided in Appendix C.

Statistics Canada began to collect data on the cost of this revised clothing and footwear component in 2005. Results based on this new component have been calculated for all years beginning with 2000.

The cost of the interim clothing and footwear component in 2007 ranged from $1,976 in Quebec to $2,629 in Nova Scotia. The median expenditure nationally in that year on all items of clothing and footwear for reference families of two adults and two children was $3,160. Thus, the cost of the MBM clothing and footwear component ranged from 62.5% to 83.2% of the overall median level of expenditure for those items.

c) Shelter

The shelter component of the MBM reflects the average of the median rents for two-bedroom and three-bedroom rental units for each community and community size in each province where the number of observations permitted a statistically reliable calculation. Households whose rents were subsidised were included in the sample, but those paying no rent were excluded as were rental units requiring major repairs.

The choice of the average of the median rents for two and three-bedroom units was made because approximately half of two-adult, two-child renting families live in each of these two types of units.

The median rent was chosen to ensure a decent quality of housing even in areas where there is a limited supply of available low-cost housing. Of course many low-income households will pay less than this amount for shelter, either because their rent is subsidised or because they are homeowners who have paid off the mortgage on their home. ^{Footnote 37}

The rent component includes utilities (water, heat and electricity) as well as the following amenities: a stove, a refrigerator and the use of a clothes washer and clothes dryer. In cases where some or all of these items were not included in the rent, Statistics Canada adjusted costs as described below.

Three sources of data were used by Statistics Canada to calculate median rent levels adjusted for the cost of utilities and amenities. These were housing data from the 2001 and 2006 Census long form, the rental supplement to the Labour Force Survey and the annual Survey of Household Spending.

Median rent levels (including utilities) in 2000 for the two types of units were calculated from the 2001 Census for each community and community size in each province. The census provides information on whether electricity, heat and water costs are included in the rent and, if not, the costs of these utilities. Weighted changes in these amounts were then applied to the years between 2001 and 2006.

Inclusion of amenities was determined using the rental supplement to the Labour Force Survey. This varied widely between provinces. For example, in 2000, 91% of two-bedroom units in British Columbia included a refrigerator in the rent compared to only 12% in Quebec. Therefore, Statistics Canada made a further adjustment to median monthly rent levels. This was done by adding the products of the percentage of rental units without each amenity in each province times the monthly amortised cost of purchasing that amenity in the second decile of the reference family. These amounts were derived from the 1999-2001 average expenditures on these amenities in the second decile of the reference family as calculated from the annual Survey of Household Spending.

There were sufficient observations in the Census to calculate the average of the median adjusted rental levels for two and three-bedroom units for nineteen distinct urban areas and twenty-nine community sizes in the ten provinces. These were then averaged and multiplied by twelve to generate the cost of the shelter component for each of these forty-eight geographical areas.

Variations in the cost of the shelter component were much wider than those for clothing and footwear. The range was from $6,149 in rural Manitoba to $13,477 in Toronto. The actual median shelter cost for all two-adult, two-child Canadian families (including homeowners) from the 2007 Survey of Household Spending was $16,960. MBM shelter costs in rural Manitoba represented 36.3% of this level, while those in Toronto were 79.5% of the national median. The median shelter cost nationally of renting for two adult, two-child families was $8,370.

d) Transportation

The transportation component of the MBM largely follows the recommendations of the National Council of Welfare in its publication, A New Poverty Line: Yes, No or Maybe? ^{Footnote 38} These recommendations are based on the insight that in contrast to the cost of shelter, the cost of basic transportation is generally less expensive in large urban areas than in smaller communities or rural Canada.

This is because in large urban centres public transit passes can provide access to a wide range of shopping outlets, professional services and employment and learning opportunities that can be matched in areas not served by public transit systems only by purchasing and maintaining an automobile. ^{Footnote 39}

Thus, in urban centres served by a public transit system, the transportation component of the basket consists of the annual cost of two adult monthly transit passes plus one round trip taxi ride a month costing $16 in 2000 to accommodate a shopping expedition where large items, which cannot be carried by hand, are purchased. The $16 amount has been adjusted annually to reflect changes in the Consumer Price Index for taxi rides for the province as a whole.

Statistics Canada determined that all but 3 of 49 urban centres with a population of 30,000 or more had public transit systems. Thus, in all centres of this size, the transportation component described in the preceding paragraph was used.

In all other areas, including Charlottetown which has a population of over 30,000 but a developing public transit system, the transportation component of the basket consisted of the cost of paying for and operating a five-year old four-door, four-cylinder Chevrolet Cavalier. ^{Footnote 40} This consists of the following items

These costs were estimated separately for each province. The insurance cost assumes that the vehicle is driven to and from work and that the adult driver has not had an accident in the past six years.

In urban centres served by public transit, the cost of the transportation component in 2007 ranged from $1,444 in Cape Breton, Nova Scotia to $2,641 in Toronto.

In areas not served by public transit systems, the cost of the transportation component in 2007 ranged from $3,536 in Alberta to $4,348 in Manitoba.

The median amount spent by all two-adult, two-child families on all forms of transportation in 2007 was $8370. ^{Footnote 41} Thus, the cost of the MBM transportation component in areas not served by public transit ranged from 42.2% to 51.9% of this level.

For a list of the cities in which transportation costs are collected by Statistics Canada by community size and the type of data collected see Appendix E.

Because it costs more to purchase and maintain a used car than it does to purchase adult transit passes, the transportation component of the MBM basket costs more in rural areas and urban centres not served by public transit than it does in urban centres where comprehensive public transit systems are available. Thus, the overall low income thresholds for rural areas using the MBM are closer to those for large urban centres than they are for the LICOs-IAT.

e) Other Goods and Services

There are several other goods and services that are encompassed by the MBM standard of consumption. The category «Other Goods and Services» includes expenditures on personal care, household needs, furniture (excluding the items included under shelter), basic telephone service, postage stamps, religious and charitable donations, school supplies and modest levels of reading material, recreation and entertainment. The reading, recreation and entertainment component includes a newspaper subscription, video rentals,YM/YWCA memberships, magazines, books and tickets for movies and local sports events. The items in the Other Goods and Services category are detailed in Appendix F.

Separately these goods and services comprise much smaller percentages of overall spending than food, clothing and footwear, shelter and transportation. Moreover, as with out-of-pocket spending for child care it is difficult to compile a standard basket component for these items.

Thus,it was decided to approximate the cost of these goods and services using a multiplier representing expenditures on them as a proportion of average spending on food and clothing and footwear by the second decile of the reference family. ^{Footnote 42} The multiplier is calculated each year using detailed micro data from the main file of the Survey of Household Spending.

The spatial price indices calculated by Statistics Canada for these other goods and services for eleven urban centres across Canada vary in a range closer to those for food and clothing and footwear than to those for shelter and transportation. Thus expenditures for shelter and for transportation were not taken into account when calculating the multiplier. These vary much more widely between communities and community types (depending on whether they are served by public transit systems). ^{Footnote 43}

This is the one component of the MBM basket whose cost is calculated using a «relative» methodology rather than being based on actual prices of specific goods and services.

The multiplier for 2007, for example, calculated as a three-year moving average (2005-2007) of the ratio of spending on these items to spending on food and clothing and footwear in the second decile of the reference family was 73.1%. Thus, in each community and community size the combined expenditure on food and clothing and footwear in 2007 was multiplied by 0.731 to determine the cost of all the other goods and services listed in Appendix F.

Since the estimated cost of the Other Goods and Services is linked to the estimated costs for food and clothing and footwear, if the latter are out of line with the standard of consumption aimed at by the MBM the error will be compounded through the multiplier. This is another reason why a revision to the clothing and footwear component of the basket has been undertaken.

The cost of these other items for reference families in 2007 was estimated to range from $6,280 in Hamilton, Ontario to $7,954 in Newfoundland and Labrador outside of the St. John's Census Metropolitan Area.

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• ²⁹ The calculation of thresholds for five community sizes is in recognition of the fact that, generally speaking, shelter costs rise with the size of the community, being lowest in rural areas and highest in the largest urban centres. The five community sizes are census metropolitan areas (CMAs) with a population of 500,000 or more, CMAs with a population of 100,000-499,999, urban census agglomerations (CAs) with a population between 30,000 and 99,999, CAs and small urban centres with a population under 30,000 and rural areas (including communities with populations under 1000 not contained in a CMA or CA). Return to reference 29
• ³⁰ In 1992, the average family spent 34.7% of its total pre-tax income on food, clothing and footwear and shelter. Thus the Low Income Cut-offs were set at the point in the income distribution where a family would spend 54.7% or more of its income on these three categories of expenditure. In 1992 the average family spent 43% of its post-income tax income on food, clothing and footwear and shelter. Thus, the post-income tax Low Income Cut-offs (LICOs-IAT) were set at the point in the income distribution where a family would spend 63% or more of its post- income tax income on these three categories of expenditure. This measure is the one highlighted by Statistics Canada in its annual reports on Income in Canada. Return to reference 30
• ³¹ The ages of the family members must be specified to calculate the cost of their expenditures on food and clothing and footwear which vary with the age and gender of the household members. Return to reference 31
• ³² See Mathieu Lefebvre, «The Redistributive Effects of Pension Systems in Europe: A Survey of the Evidence», Luxembourg Income Study Working Paper No. 457 (March 2007), page 3. Return to reference 32
• ³³ Out-of-pocket spending on child care and non-insured health care spending recommended by a health professional are not included in the cost of the basket because spending on these items varies so widely from family to family depending on the availability of free or subsidized child care and the health needs of family members. No «standard» basket component for either category of expenditure could be reasonably set. However, families that must spend significant amounts of money on such items obviously experience more difficulty purchasing goods and services to meet their household needs than those who do not have to bear such costs. This is accounted for by deducting the amount spent on these items from each family's total money income before comparing it to the MBM thresholds. Return to reference 33
• ³⁴ About 75% of those interviewed for the SLID gave permission to extract data from their income tax returns. All those who did so but did not report a positive amount on line 330 had the amount imputed in the same way as those who did not give access to their tax returns. Return to reference 34
• ³⁵ See Judith Lawn,National Nutritious Food Basket 1998, Health Canada (Ottawa, 1998). This publication was compiled under contract with the Nutrition and Healthy Eating Unit of the Health Promotion and Programs Branch of Health Canada. It reflected input from Federal, Provincial and Territorial nutritionists. Return to reference 35
• ³⁶ It is assumed that in each province the cost of the food basket in rural areas is the same as in the smallest urban centre for which food price data are collected. Return to reference 36
• ³⁷ Homeowners with no mortgage still must pay shelter costs such as property taxes, utilities and home insurance, but these are usually less than rents, which take these costs into account. However, at present there is no data source available which calculates, for each household, the value of rent subsidies paid in the form of rent-geared-to-income rents or the actual shelter costs of homeowners who have paid off their mortgages. This lack of data affects all low-income measures since the lower shelter costs faced by such households should be considered a form of imputed income. Its impact for the MBM is to overestimate the number of persons in families who lack the disposable income to purchase the standard of consumption represented by the MBM basket of goods and services. This overestimate is likely to be particularly important for persons over age 65 and for residents of the rural portions of the Atlantic Provinces, Manitoba and Saskatchewan where the proportion of households who own their residence without a mortgage is well above the average for Canada. Return to reference 37
• ³⁸ See National Council of Welfare,A New Poverty Line: Yes, No or Maybe? (Ottawa: Winter 1998-99), p.24 Return to reference 38
• ³⁹ The National Council of Welfare did not include the cost of purchasing the car in its recommendations. Return to reference 39
• ⁴⁰ The cost of this component of the basket is highly sensitive to the age of the car. If a six-year old car were purchased every six years instead of a five-year old car every five years, the cost of transportation in areas outside those served by public transit systems would be reduced by $900. This particular model was chosen because it is widely available in used car outlets across Canada. Return to reference 40
• ⁴¹ This includes spending on inter-city train, bus and airline tickets not included in the MBM transportation component in either areas served by public transit or those with no public transit locally available. Return to reference 41
• ⁴² The multiplier was calculated using the expenditure patterns of the second decile because, since 1980, the low income rate for families of 4 persons using Statistics Canada's 1992 base pre-income tax Low Income Cut-offs has never exceeded 15%, the mid-point of the second decile. Return to reference 42
• ⁴³ For the eleven cities surveyed to compile the relative spatial price indices in October 2005, the cost of shelter in the least expensive city was 37% below what it was in the most expensive city; for private transportation the cost in the least expensive city was 15% below what it was in the most expensive city. However, for clothing and footwear the differential was 6%, while for food and for household operations and furnishings it was 10%. Return to reference 43

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Date Modified:

2011-12-14