Section 1
Introduction

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Following a critical review and extensive user consultations on the Low Income Cut-Offs (LICOs), Statistics Canada introduced the Low Income Measure (LIM) as an alternative low-income line in the early 1990s.¹ The LIM is a distribution-based relative measure of low-income. Using the LIM, the low-income status of an individual is determined relative to the incomes of the rest of the society, as opposed to a set of minimum needs. In this sense, the LIM thresholds are independent of country specific aspects of consumer preferences and customs. This characteristic makes LIM particularly appropriate for international comparisons and this is why the Organisation for Economic Co-operation and Development (OECD) uses a LIM methodology to compare low-income across member countries.²

The general LIM methodology has also been employed by several Canadian authors to determine low-income thresholds and to study low income and poverty issues in Canada from both an international and national perspective. Osberg and Xu (1999), for example, compared low-incomes across Canadian provinces and between the ten provinces and three countries (Belgium, United States and Sweden). More recently, Veall (2008) examined low-income rates among seniors for Canada, Australia, Germany, Netherlands, the U.K. and the U.S. over a 30-year span. Finally, in 2009 the Province of Ontario has adopted the LIM as one indicator of the progress of its poverty alleviation strategy.

In order to preserve and capitalize on the strength of LIM, a methodological revision is perhaps overdue. Firstly, at the time of its creation, some aspects of the Canadian LIM methodology were different from those employed by other countries and international organizations. For example, economic family is the basic unit of accounting under the Canadian LIM, while internationally household has been the basic unit in which individuals pool their resources.

Secondly, and perhaps more importantly, international practices, such as the equivalence scale adopted to account for the economies of scale in consumption, have evolved over time, while the LIM methodology remains unchanged. Moreover, one of these new norms is a recognition that using multiple different low-income measures can better describe aspects of the complex phenomenon of poverty than a single line. For example Great Britain has officially adopted three different low income lines and the Province of Ontario has adopted two LIM lines and a series of other indicators. The current LIM could thus be strengthened to facilitate international comparisons as well as to provide a relative measure of low-income in the context of other low-income lines in Canada.

This paper proposes three modifications to the existing LIM methodology. Currently, LIM assumes economic family as the basic accounting unit in which individuals pool income and enjoy economies of scale in consumption. Following the practices of the OECD and the Luxembourg Income Study (LIS), the first modification is to replace economic family by household as the basic accounting unit. Secondly, we propose to replace LIM's Canadian specific equivalence scale by the more widely used square root of household size scale to take into account the economies of scale in consumption. Finally, we propose to change the method by which the low income thresholds are estimated. Under the current methodology, economic families are ranked according to their adjusted incomes, adjusting by family size, and half of the estimated median of this distribution is defined as the standard low-income threshold (for a single adult). We propose to rank individuals rather than economic families to find the median and thus the low-income threshold.

This study reports the effect of each of the above modifications as well as their joint effects on low-income statistics over the past 30 years. We found that the first two modifications led to little change on Canada's low-income statistics, but the third modification turned out to have a significant impact. For example, the overall low-income rates under the existing and the proposed LIMs started to diverge from the mid- 1980s, with low-income rates under the revised LIM systematically above those under the existing LIM.

The paper proceeds by first reviewing current LIM methodology and discussing the three modifications. The impact of each independent modification on low-income incidences is then presented followed by an examination of the joint effects of the three modifications. The paper concludes with a summary.

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Notes

1. For details, see Wolfson et al. (1989).
2. See OECD (2008) for its most recent publication.