Income Research Paper Series – Research Paper
Revising Statistics Canada's Low Income Measure (LIM)
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Since the economic well-being of individuals and families is a multi-faceted phenomenon, the state of the art in low-income measurement suggests one needs to adopt a multi-dimensional view. In this respect, a suite of low-income lines is preferred to a single line. In recent years Statistics Canada has adopted this view and annually produces three major lines. Among the three low-income lines, Low Income Measure (LIM) is the only one with which we can conduct valid international comparisons. In order to strengthen this particular characteristic of the LIM, a major revision of the Canadian LIM is perhaps overdue.
The revision is needed for two reasons. Firstly, at its inception, the methodology of the Canadian LIM was not identical to international norms, and secondly, international practices themselves evolved over time. It is desirable to keep the Canadian practices aligned with those of other countries. In this regard, we proposed three modifications: replacing economic family by household as the basic accounting unit in which individuals pool resources and enjoy economies of scale in consumption; replace the Canadian specific equivalence scale by the more popular and widely used square root of household size; and define the standard low-income threshold by the median of individual income distribution rather than family income distribution.
Our empirical results indicate that the first two modifications have little consequence in terms of the low-income incidence, but the third modification systematically increases our estimated low-income rates above those of the existing LIM methodology beginning in the mid 1980s. Underlying this result was the fact that family/household structure has changed over the past 30 years. In the mid 1970s, the size of families/households at the bottom of the income distribution was larger than the size of families/households at the top of the distribution. But since the mid 1980s, this has reversed and families in the bottom quartile are smaller. On the other hand, the new equivalence scale, coupled with declining family/household size over time, appeared to slightly decrease our estimates for the low-income gap and severity indexes.Overall, we found the modifications are reasonable and worth implementing. They make the Canadian LIM methodology comparable to that of current international practices. At the same time, they do not seem to invalidate the broad trends in low-income statistics observed under the existing LIM. Finally, the modifications create further conceptual differences with the other low-income lines produced by Statistics Canada; for example, taking changing family size into account, and as such provide a good compliment to other threshold measures that facilitate a fuller description of low-income in Canada.