Income Research Paper Series
Market Basket Measure Research Paper: Options for updating the other necessities component and the creation of a communication services component

On August 21, 2018, the Government of Canada released Opportunity for All: Canada’s First Poverty Reduction Strategy (the Strategy), which outlined long-term commitments to guide current and future government actions and investments to reduce poverty. The Poverty Reduction Act legislates key commitments made in the Strategy and mandates that Statistics Canada review the content of Canada’s official measure of poverty, the Market Basket Measure (MBM), on a regular basis.

During consultations for the MBM’s second comprehensive review, as well as during the analysis leading to the creation of the 2018-base MBM, several MBM research items were identified as requiring further study (e.g., MBM thresholds for remote regions, different family sizes and a poverty index).^Note  These research topics and their related methodological underpinnings form the basis for the MBM’s forward-looking research agenda and are being explored in detail through MBM research papers. The MBM research papers will be published in preparation for the third comprehensive review of the MBM, launched in June 2023.^Note 

This discussion paper addresses options and considerations related to two research agenda items: updating the other necessities basket component and potentially creating a communication services component in the MBM methodology. It also provides an opportunity for the public and stakeholders to provide feedback and comments on the considerations presented in this paper.

Introduction

The MBM establishes poverty thresholds based on the cost of a basket of food, clothing, shelter, transportation and other necessities for a family of four that reflects a modest, basic standard of living. A family with a disposable income below the appropriate MBM threshold for the size of the family and the region of residence is considered to be living in poverty.^Note 

Due to the complexities caused by the changes in the collection methodology of the Survey of Household Spending (SHS), the data source used for deriving costs associated with the MBM’s other necessities component, the possibility of updating the other necessities component with more recent SHS data was added as a forward looking research topic following the second comprehensive review of the MBM.^Note  Furthermore, given the interconnectedness between updating the other necessities component and creating a communication services component, the two research topics are discussed in unison in this discussion paper.

This paper begins by explaining how costs associated with other necessities and, more specifically, information and communications technology (ICT) are currently accounted for in the 2018-base MBM methodology. It then offers considerations for the update to the other necessities component and how to define a potential communication services component. Readers are encouraged to provide feedback and comments.

A brief overview of the other necessities component in the Market Basket Measure methodology

The other necessities component is an estimate of the costs for goods and services that are not captured under the shelter, clothing, food and transportation components (e.g., household items, personal care and educational activities).^Note  The methodology for costing these other goods and services does not rely on prices of specific items as is the case for other components of the basket. Doing so would be extremely complex given the number of items that would potentially need to be priced and the likelihood that many of those items could be considered necessities for some families but not for others. Consequently, the other necessities component is meant to approximate average expenditures on a wide range of other necessary goods and services; currently, for the 2018-base MBM, it includes expenditures for cellphones and associated cellular services.

The derivation of the other necessities component uses data from Statistics Canada’s SHS. Starting in 2010, the SHS underwent a redesign that made changes to the questionnaire and introduced a two-week diary.^Note  These changes made it easier for respondents to recall their expenditures more accurately, resulting in expenditure data being collected with respect to a reference period (e.g., last week, last month or last year). In addition, expenditure categories in the redesigned SHS were also updated to a new custom product classification. These changes to the concepts, recall periods and mode of collection raised questions regarding the suitability of using the 2008-base inclusion rule with the redesigned SHS data for use in the 2018-base MBM methodology.

As a result, during the second comprehensive review of the MBM (2018 base), the fixed percentage (or multiplier) used for costing the other necessities component was held constant at 75.4%. The value of this multiplier was established during the first comprehensive review and was based on 2008 and 2009 SHS data on the historical spending patterns of a set of selected expenditure categories deemed necessary for a modest, basic standard of living. Since the 2018-base MBM used a multiplier based on the 2008 and 2009 reference years of the SHS, a period when expenditures on cellphones were relatively low compared with today, an additional amount for cellphone services (ranging from about $800 to $1,400 per year, depending on the province) was added to the 2018-base MBM’s other necessities component.^{Note  Note  Note} 

Accounting for communication costs in the Market Basket Measure

During the second comprehensive review of the MBM, as well as during the analysis leading to the 2018-base discussion paper series, additional questions regarding the other necessities component were raised. These questions centred on the critical importance of communication services and technology and how these were no longer an ‘other necessity’ but a key expenditure category that should be accounted for in a distinct component within the MBM methodology. For example, the 2018-base consultation process highlighted the universality of communication service needs and the fact that people in low-income households rely on cellphone services and pay for basic Internet services. Moreover, students and parents of school-age children agreed that Internet access and a computer at home were deemed essential.

As previously mentioned, costs associated with these communication services are currently accounted for through the other necessities component. However, stakeholder feedback during the second comprehensive review of the MBM indicated that including communication costs in the other necessities component minimized the importance of these services and made it difficult to track their associated costs over time. In addition, recent reporting indicates that, on average, Canadians spend more on cellphone services compared with residents of other countries, further emphasizing the importance of monitoring these costs.^Note 

To address these concerns, Statistics Canada and Employment and Social Development Canada committed to investigating how a separate communication services component could be accounted for in the MBM methodology. Given the connection between updating the other necessities component and the potential creation of a communication services component for the MBM, the remainder of this discussion paper presents a possible approach and related considerations to addressing both items simultaneously. The aim of this exercise is to garner feedback from the public to help shape the direction of the MBM methodology.

Updating the other necessities component and possible additional refinements

The following section provides a short explanation of the other necessities multiplier. It also details an approach for updating the other necessities multiplier with more recent SHS data and creating a communication services component consisting of communication services considered necessary for achieving a modest, basic standard of living.

Updating the other necessities component

The data inputs used for calculating the other necessities multiplier come from SHS expenditure data on various goods and services among reference family^Note  households with before-tax income in the second decile of that population. The multiplier is then calculated as the ratio of the average spending on other goods and services to the average spending on food and clothing:

$$\left(\raisebox{1ex}{$x_{on}$}\!\left/ \!\raisebox{-1ex}{$x_{fc}$}\right.\right),$$

where

$x_{on}$ : average expenditures on other goods and services

$x_{fc}$ : average expenditures on food and clothing.

To help reduce the annual variability in costs attributable to the small sample size (reference families in the second decile), the current multiplier was calculated as the weighted average of the 2008 (with a weight of one-third) and 2009 (with a weight of two-thirds) expenditure values. This multiplier was then applied to the total cost of the food and clothing basket components to estimate the cost of other necessary expenses. For examples of how other countries estimate their other component costs for existing basket-based, low-income measures, please see the “What do other countries do?” text box below.

Start of text box

What do other countries do?

Canada is not the only country that uses an absolute measure of poverty with a non-defined expenditures component. For example, in the United States, the Bureau of Labor Statistics’ Supplemental Poverty Measure has a “plus a little more” component that uses a simplified multiplier (1.2) against the costs of its defined components (e.g., food, shelter, clothing and utilities). Similarly, the absolute poverty measure used by Italy, starting in 2005, has a residual component that uses a linear regression model to estimate its costs in relation to its food component.

End of text box

During the first comprehensive review of the MBM (2008 base), an inclusion rule was developed to determine which expenditure categories to include in the numerator of the multiplier. The inclusion rule stated that an item would be included if more than 70% of reference families in 7 out of 10 provinces and 70% of reference families in Canada reported expenditures on that item. However, not all items meeting that threshold were included, because the items also needed to abide by the MBM’s modest and basic standard of living definition.^Note 

The analysis conducted during the second comprehensive review (2018 base) showed that following the previously developed inclusion rule with the latest SHS redesigned data resulted in unusable (i.e., extremely large) estimates for the multiplier.^Note  For example, the change in differing recall periods (e.g., last month, last 3 months and last 12 months) resulted in more detailed expenditure categories (e.g., household linens) not meeting the inclusion rule and less detailed expenditure categories meeting it (e.g., household furnishings and equipment). Not being able to identify lower-level expenditure categories resulted in an inflated numerator, yielding an impractically high multiplier value. In addition, seasonal effects caused by the shorter recall periods could impact the expenditures for certain categories, too. Therefore, following the historical inclusion rule was deemed inappropriate when using redesigned SHS data.

One potential approach for updating the other necessities component

A possible approach for updating the other necessities component could be to recalculate the multiplier with more recent SHS data on the historical household expenditure categories considered for the 2008-base multiplier, while possibly adjusting for expenditure categories that were not historically prevalent but are relevant today. This approach assumes that while total expenditures may change over time, the expenditure categories that families typically spend money on are fairly static (e.g., personal care products, children’s toys and movie theatre admissions). However, a few expenditure categories could be added or removed given changes in what a family could consider as essential.

In addition, the SHS population for whom expenditure categories would be analyzed could also be updated. Updated SHS population specifications would better reflect the MBM reference family and take into account regional differences in income-levels. For example, instead of using expenditure data from reference family households with two adults and two children and taking the second income before-tax decile of that population at the national level, families with two adults aged 25 to 64 years and two children aged 6 to 16 years could be used, taking the second income before-tax decile at the provincial level. This approach would allow for a larger sample on which to recalculate the multiplier and make the calculation more sensitive to regional variation in expenditures. Using the historical other necessities expenditure categories while updating the expenditure values with more recent SHS data from a refined target population would help keep consistency between MBM bases and maintain the underlying structure of the MBM.

Appendix B details the calculation of the other necessities multiplier using the historical expenditure categories, more recent SHS data (2021, 2019 and 2017) and the updated SHS population sample suggested previously. For this exercise, the annual multiplier values for 2021, 2019 and 2017 would be estimated at 0.788, 0.746 and 0.806, respectively, for an overall average value of 0.780.^Note  Note  It should be noted that the other necessities component in the 2018-base MBM has an additional amount for cellphone services^Note  , which would no longer be required since updating the multiplier with more recent SHS data would reflect more contemporary and accurate expenditures on cellphone services.

Revision of household expenditure categories

As mentioned, the historical expenditure categories considered for the other necessities multiplier could be restricted or expanded depending on what is considered essential. There is a degree of subjectivity with respect to what categories could be considered essential today versus 15 years ago (when the current multiplier categories were first conceived). The list of expenditure categories that could be dropped or added are provided in Appendix B. The expenditure categories to be used in the numerator of the other necessities multiplier will be determined by Employment and Social Development Canada (ESDC) based on input from experts and existing research.

As mentioned, the numerator of the current other necessities multiplier includes expenditure categories for communication services and equipment.^Note  During the second comprehensive review of the MBM (2018 base), the numerator was recognized as undervaluing the expenses typically spent on cellphone equipment and services, so an additional amount was included.

In addition to updating the expenditure values to the more recent SHS data and potentially revising the list of expenditure categories, communication services could be removed from the numerator of the multiplier to construct a separate communication services component. Certain guidelines related to access to communication services have been adopted in recent years, which could help provide a rationale for including communication services in the MBM as a separate component and not as part of the other necessities component as is currently done. 

The following section will describe one possible approach for moving communication services costs from the other necessities component to a new communication services component. It will also explain why communication equipment should remain in the other necessities component.

Creating a communication services component

In recent years, ICT has become key to the public, private and professional lives of Canadians, enabling essential social and economic activities and supporting social inclusion, employment, use of government services, access to information, procurement of goods, etc.

Given the critical importance of ICT, one of the suggested improvements proposed during the second comprehensive review of the MBM was to create a new, separate ICT-related component in the MBM basket. The potential items to include in this component are described below.

Start of text box

Digital poverty

Digital poverty can be understood and defined in different ways. For example, it can mean not having enough income to purchase ICT, lacking the knowledge and skills to use the technology, or having barriers to accessing services. Since the MBM is an income-based measure, only the income-related dimension is considered here.

End of text box

Items for a potential communication services component

A new ICT-related component would be challenging to create for communication equipment, since there is no standard regarding the type and specifications of devices considered essential for communications purposes (e.g., smartphones, tablets and laptops). Given the variability of options, it is proposed that costing method for communication equipment continues to be done in the other necessities component. Therefore, it is proposed that an ICT-related component includes only communication service costs that are considered essential by existing guidelines and that could be priced with available data. This component would thus help better capture costs associated with such services going forward, moving away from the current practice of adding an additional amount for cellphone services to the other necessities component.

In 2015, the Canadian Radio-television and Telecommunications Commission (CRTC)^Note  launched a proceeding to examine the telecommunication services Canadians required to participate in the digital economy and the commission’s role in ensuring the availability of basic telecommunication services to Canadians. In late 2016, the CRTC issued a decision outlining key determinations regarding communication services, which included the recognition that broadband Internet access services are vital to Canada’s economic, social, democratic and cultural fabric and that the following services are basic telecommunications services within the meaning of subsection 46.5(1) of the Telecommunications Act: fixed and mobile wireless broadband Internet access services, and fixed and mobile wireless voice services.^Note 

From this perspective, creating and costing a separate communication services component would be in line with other MBM components (e.g., food, clothing and shelter), which rely on guidelines or standards developed by experts or set by policy. It is therefore presented for consideration that the following three subcomponents be used to form a potential communication services basket component: landline services, cellphone services and Internet access services. The total cost for the communication services component would be based on a yet-to-be determined methodology, and could involve, for instance, a weighted average of the costs of each service based on existing data regarding service usage. The creation of this component would imply, however, the removal of communication services expenditures from the numerator of the other necessities multiplier.^Note 

Landline services

While landline usage has been declining in recent years, a significant number of households in Canada in the lower end of the income distribution still report having expenditures on landline services and equipment. For example, according to SHS data, in 2019, around 51% of lower-income households in Canada reported having expenditures on landline services and equipment.  Landline use was most prevalent among lower-income households in the Atlantic provinces, Newfoundland and Labrador (70%) and New Brunswick (69%) topping the list. In addition, expenditures on landlines and equipment were most prevalent among lower-income households where a senior was present (77%).^Note  Note 

The costs for landline services could be based on the annual price for basic landline services in each province, including a one-time installation fee. The costs of these service plans could be sourced from the lowest reported prices for basic landline telephone services in rural and urban areas of each province in 2018, using the CRTC’s 2019 Communications Monitoring Report. By contrast, installation fees could be based on an average cost collected from a variety of service providers and be amortized over five years^Note  and adjusted for other years using the provincial all-items Consumer Price Index. Provincial costs for landline services could be calculated by taking the population weighted aggregate of the rural and urban costs.

Cellphone services

Given the composition of the MBM reference family (two adults in the 25-to-49 age group and two children aged 9 and 13 years), the communication services component could cost out service plans for each adult family member and consider the possibility of a service plan for the oldest child.^Note  Total costs for cellphone services would include the annual price for cellphone plan subscriptions, including subscriber identity module (SIM) cards and their activation fees. The cost of the SIM card and activation fee for cellphone services could be calculated using the fees listed on selected cellphone service provider websites^Note  and amortized over five years.

The standard established by the CRTC for a bring your own device plan could be used for the cellphone plan subscription cost. The CRTC mandated that, as of July 14, 2021, all major cellphone service providers must provide a minimum plan that costs $35 per month^Note  and should include three gigabytes of monthly data, unlimited Canada-wide incoming and outgoing calls, and unlimited text messages.^Note 

Internet access services

The total cost for Internet access services could include an amortized one-time installation fee, and plan costs could be estimated using the lowest reported prices for residential broadband Internet access services for each province.^Note  The one-time internet installation fee could be estimated by taking the average posted installation fee from major Internet service providers^Note  and amortized over five years.^Note 

Decision-making elements: Updating the other necessities component and potentially creating a communication services component

As described above, updating the other necessities component multiplier and creating a new communication services component for the MBM would require several decisions. Expert feedback is therefore sought on the following decision-making elements:

1. Updating the other necessities component multiplier
   • A decision must be made on whether to retain the existing multiplier or to update it using more recent data from the SHS. Furthermore, if a revision to the expenditures categories were to take place, ESDC would need to make the final decision, with guidance from experts and existing research, to determine which expenditure categories could be subject to inclusion, exclusion or substitution from the existing list of expenditure categories found in Appendix B. Lastly, consideration must be given to whether the SHS population sample over which the multiplier is calculated should be updated and aligned with provincial-level income deciles.
2. Creating a new communication services component
   • A decision will be required on whether the existing additional amount for cellphone services that is currently added to the other necessities component should simply be revised or be entirely extracted from such component to create a new component that captures the costs associated with communication services more generally. Additionally, decisions on what specific services to cost under a new communications services component would be needed: inclusion of landline services and associated installation fees, residential home internet services and associated installation fees, the type and number of cell phone plans per reference family, etc.  Lastly, consideration will need to be given to the precise methodology required for costing this communication services component, such as the potential of applying a weighted average to the cost of different services based on current usage trends.

Conclusion

This paper describes a potential approach for updating the other necessities component and for creating a communication services component for the MBM. Since the previously used inclusion-rule method for deriving the other necessities multiplier is no longer possible, an approach to update the multiplier value using more recent SHS data from an enhanced population sample and relying on previously used household expenditure categories is presented. In addition, a communication services component, based on the CRTC’s guidelines for communication services access, is also discussed. If created, this component would serve to capture communication services that are now considered essential for a modest, basic standard of living, thus removing these services from the other necessities component of the current MBM methodology (2018-base).

As with the other products in this series, this paper aims to foster engagement and debate with the public and stakeholders to explore research topics that could help inform discussions for the next comprehensive review of the MBM, improve the understanding of the MBM methodology, and potentially expand analytical tools that involve or rely on the MBM. Users are welcome to ask questions, provide feedback and make suggestions for future work on any topics relevant to the MBM.

Those who are interested in contacting us are encouraged to do so by emailing statcan.market.basket.measure-mesure.du.panier.de.consommation.statcan@statcan.gc.ca.

Appendix A



Appendix B

   

References

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