Income Research Paper Series – Research Paper
Low Income Lines, 2008-2009
Low income measures
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What is the LIM?
For the purpose of making international comparisons, the low income measure (LIM) is the most commonly used low income measure. The use of the LIM was suggested in 1989 in a discussion paper written by Wolfson, Evans, and the Organisation for Economic Co-operation and Development (OECD)1 which discussed their concerns about the low income cut-offs (LICOs). In simple terms, the LIM is a fixed percentage (50%) of median adjusted household2 income, where "adjusted" indicates that household needs are taken into account. Adjustment for household sizes reflects the fact that a household's needs increase as the number of members increases. Most would agree that a household of five has greater needs than a household of two.
The LIMs are calculated three times; with market income, before-tax income, and after-tax income using the Survey of Labour and Income Dynamics (SLID). They do not require updating using an inflation index because they are calculated using an annual survey of household income. Unlike the low income cut-offs, which are derived from an expenditure survey and then compared to an income survey, the LIMs are both derived and applied using a single income survey.
Changes to the LIM – accounting unit, unit of analysis and equivalence scale
With this release, some changes have been made to the concepts around the Low Income Measures (Murphy, Zhang and Dionne 2010). These changes relate to the accounting unit utilized, the unit of analysis and the equivalence scale.
In previous years, the economic family was the accounting unit in which individuals pooled income to enjoy economies of scale. However, beginning this year, the household has replaced the economic family in the LIM. The rationale for this change is twofold. Firstly, housing costs such as mortgage interest or rent and utilities are likely shared among individuals living in a dwelling, regardless if they are part of a different economic family. Secondly, the household is the international standard when analysing income distribution (The Canberra Group 2001).
In addition, a change also appears at the unit of analysis. The median is no longer calculated over the population of families or households, but over the population of individuals. Hence, each persons in the population is represented by its adjusted household income. The LIM is then defined as 50% of the median of the adjusted household income observed at the person level.
Finally, the equivalence scale has been changed. In the past, the scale used by Statistics Canada was as follows:
- the oldest person in the family was assigned a factor of 1.0;
- the second oldest person in the family was assigned a factor of 0.4;
- each of the other family members aged 16 and over was assigned a factor of 0.4;
- each of the other family members under age 16 was assigned a factor of 0.3.
The adjusted income amount for the family was then obtained by dividing the family's income by the sum of the factors assigned to the family's members.
In order to ensure international consistency and to facilitate the calculation of adjusted household income, a new scale will now be used. From now on, adjusted household income will be obtained by dividing household income by the square root of the number of members in the household. Previous years' LIMs have been revised accordingly.
How is the LIM calculated?
In order to calculate the LIMs, first calculate "equivalent household income" for each household by dividing household income by its adjusted size, that is the square root of the number of persons in the household. Next, assign this adjusted household income to each individual in the population. Then determine the median of this "equivalent household income" over the population of individuals, that is the amount where half of all individuals will be above it and half below. The LIM for a household of one person is 50% of this median "equivalent household income", and the LIMs for other sizes of households are equal to this value multiplied by their "equivalent household size".