A Unified Approach to Measuring Poverty and Inequality
The use of average income implies that each period’s income is a perfect substitute for any other period’s income. Alternative methods that allow for imperfect income substitution across periods have been proposed: see Calvo and Dercon (2009) or Foster and Santos (2006). • In the spells method, exemplified by Foster (2009), the chronically poor are those whose incomes are frequently below the poverty line, say, in two of four periods. People with fewer poverty spells are not chronically poor—their spells are censored out when chronic poverty is measured. Aggregation proceeds as in the standard FGT case, but now data on spells, normalized gaps, and squared normalized gaps are collected in matrices. The dimension-adjusted FGT indices are simply the means of the respective censored matrices. For example, the dimension-adjusted headcount ratio is the number of spells experienced by chronically poor people divided by the maximum number of spells that could be experienced by everyone. This approach assumes there is no income substitution across periods, and, indeed, incomes are never aggregated as they are in the components approach. It also presumes that poverty spells have the same value, no matter the period or person. Either approach to measuring chronic poverty allows the separate identification of chronic and transient poor and a corresponding decomposition of poverty into chronic and transient components. This can be particularly useful for tracking chronic poverty across subgroups for better targeting of the policy mix. Note that chronic poverty measurement increases data requirements substantially. Panel data linked across periods at the individual or household level are needed to undertake this form of measurement; it is not enough to have multiple data cross-sections. Given the relative scarcity of panel data, substantial efforts are being devoted to find novels ways of constructing virtual panels from cross-sectional data. See, for example, Dang and others (2011).
Multidimensional Poverty There is interest in developing and applying poverty measures that are multidimensional in that shortfalls from multiple welfare indicators are
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