Objective and Subjective Poverty

Synonyms

Deprivation from happiness and deprivation from wealth; Informal and official poverty; Material and subjective poverty; Qualitative and quantitative approaches of poverty

Definition

Subjective poverty is the subjective perception of deprivation. Two approaches can be distinguished in defining subjective poverty. On the one hand, poverty can be defined by examining who is in general considered to be poor. On the other, it can also be defined by collecting their beliefs about their own position in a system of inequalities.

In most of the cases, however, poverty is defined based on some objective measure. Income level is the most widely used measure to do so. Besides, number of children, age, education attainment, labor market position, or level of comfort can also be applied as a basis for defining objective poverty. Three main concepts of objective poverty can be distinguished: absolute, relative, and (welfare) political.

Description

Two main concepts of poverty are distinguished in the poverty literature: subjective and objective poverty (refer to Table 1).

Objective and Subjective Poverty, Table 1 Concepts of poverty

Subjective Poverty Concepts

Subjective concept of poverty was elaborated by two research groups. Van Praag (1971) worked out the Income Evaluation Question (IEQ) to collect data on subjective well-being. Deleeck and his staff defined CSP (subjective poverty line). Subjective poverty concept is often used in two ways. On the one hand, poverty can be defined by examining who people consider to be poor. It can also be defined by collecting peoples’ beliefs about their own position in a system of social inequalities (Spéder, 2002). Subjective poverty concept can reflect subjective well-being.

Happiness, a part of subjective well-being, is considered to be the ultimate goal of human life by a reasonable part of the society. Happiness research is relevant for economists for multiple reasons. It can inform economic policy decisions to make it possible to reach a Pareto-improving proposal (actions that do not entail costs for other individuals). Further, it highlights the importance of institutional conditions such as the quality of governance, the size of social capital, or the rule of law on subjective well-being, and it can also help in understanding the formation of subjective well-being (Frey & Stutzer, 2002) and peoples’ values, behavior, and belief (Samman, 2007).

People can be asked about the amount of money they consider to be necessary in order to satisfy the minimal needs related to a minimal human lifestyle. Subjective poverty threshold can be defined based on the weighted average of per capita or per household amount of what people believe to be necessary. Information on subjective poverty and subjective well-being is usually derived from household surveys. The World Value Survey, for example, measures subjective well-being with the following questions: “Taking all things together, would you say you are very happy, quite happy, not very happy, or not at all happy?” or “All things considered, how satisfied are you with the your life as a whole these days?.” Subjective well-being and poverty can also be measured by other subjective measures, like personality or the evaluation of friends and relatives. Stevenson and Wolfers (2008) conclude that self-reporting standard of living and other subjective measures of well-being are usually highly correlated.

The intertemporal assessment of subjective poverty can be a big issue because of the excess amount of available data. The frequent changes in the data collection methods (like scale differences in the measurement over time) make it very difficult to draw reliable conclusions (Stevenson & Wolfers, 2008).

Objective Poverty Concepts

Besides subjective concept of poverty, three main poverty conceptions are distinguished in the literature (refer to Table 1), which are called objective poverty concepts.

Objective or official concepts of poverty are usually derived from ideology. Ideologies – no matter if they are ethical, legal, political, religious, etc. – are realized in institutions. Ideologies always belong to classes; therefore, they can never be socially neutral. The ruling ideology usually forms the essential power of the dominant class. This ideology is elaborated by the state apparatuses (Poulantzas 1978). Althusser (2008) says that ideology always interprets individuals as subjects. The term subject refers to

(1) a free subjectivity, a center of initiatives, author of and responsible for its actions; (2) a subjected being, who submits to a higher authority, and is therefore stripped of all freedom except that of freely accepting his submission. (Althusser, 2008, p. 56)

That is why all subjects “work by themselves.” In terms of poverty and inequalities, it means that a political concept of poverty reflecting the ideology of the ruling class blames only individuals for being poor, and not politics or economy. This welfare political concept derived from ideologies is independent of the beliefs of the dominated classes, who are more endangered by poverty and social exclusion than the ruling class. Thus, in order to get a clear understanding of poverty, the examination of the differences between political concept of poverty and subjective perceptions is of crucial importance.

Welfare political concept of poverty is important because many kinds of public aid (social supports, family allowances, grants for the underprivileged) are distributed using it. In most of the cases, some income level is used to define welfare political poverty. A threshold for this can be a certain portion of the minimal pension (Spéder, 2002). Besides, old age, the number of children, or the education level can also be applied as poverty lines. Any deviation between these thresholds and the subjective poverty lines has serious consequences and distorts the welfare system.

Absolute concepts of poverty assume that minimum material needs can be defined regardless of space and time. Those who are not able to satisfy these needs are considered to be poor. The subsistence level is the amount of money that ensures the fulfillment of moderate needs related to a minimal lifestyle. When subsistence levels are different for the different regions of a country, they are called regional minimum. The World Bank applies absolute poverty thresholds when it defines poverty as living below USD 1.25 or 2 a day. The use of these thresholds makes international comparison of poverty possible across countries. It, however, ignores wage and price differences that can play an important role in defining the sum of money necessary to make ends meet.

The relative conceptions define poverty as being below some relative poverty threshold. People can be considered to be poor if they fall below some average wealth level of the society to a certain extent (e.g., 50 or 60 % of mean or median income). The other approach using the relative poverty concept defines poverty line as an income level below which a certain part (one tenth or one fifth) of the population lives (Hegedus & Monostori, 2005). The European Union worked out the system of Laeken indicators in 2001, which defines several – mainly relative – measures of poverty. Its application makes it possible to compare the poverty of different level NUTS regions. The primary Laeken indicators are the following:

• Indicator 1a: At-risk-of-poverty rate, by age and gender

• Indicator 1b: At-risk-of-poverty rate, by most frequent activity status and gender

• Indicator 1c: At-risk-of-poverty rate, by household type

• Indicator 1d: At-risk-of-poverty rate, by accommodation tenure status

• Indicator 1e: At-risk-of-poverty threshold (illustrative values)

• Indicator 2: Inequality of income distribution – S80/S20 income quintile share ratio

• Indicator 3: At-persistent-risk-of-poverty rate, by gender (60 % national median)

• Indicator 4: Relative median at-risk-of-poverty gap, by gender

• Indicator 5: Regional cohesion (dispersion of regional employment rates)

• Indicator 6: Long-term unemployment rate, by gender

• Indicator 7: Persons living in jobless households, by age and gender

• Indicator 8: Early school leavers not in education or training, by gender

• Indicator 9: Life expectancy at birth, by gender

• Indicator 10: Self-defined health status by income quintile by gender (Guio, 2004)

Relative income concerns may help understanding many economic phenomena (Carlsson, Johansson-Stenman, & Martinsson, 2007), like aggregate consumption and saving patterns (Basmann, Molina, & Slottje, 1988), wage formation (Agell & Lundborg, 2003), labor supply (Neumark & Postlewait, 1998), or the overconsumption of goods consumed primarily to demonstrate wealth and success (Carlsson et al., 2007).

Relationship Between Subjective and Objective Concepts of Poverty

Neither absolute and relative nor political poverty measures introduce any explicit role for nonmonetary components, and therefore, they are not based on happiness. Thus, they presumably significantly differ from subjective poverty assessment. Many studies have focused on the correlation between subjective indicators and material well-being. There are two main approaches in these studies: the questionnaire-experimental approach and the subjective approach (Castilla, 2009). Results from the questionnaire-experimental approach suggest that relative income position is as important as the absolute one (Carlsson et al., 2007; Johansson-Stenman & Martinsson, 2006), while studies using subjective approach conclude that relative poverty is usually more important (Clark, Frijters, & Shields, 2008; Easterlin, 1995).

Behavioral economics takes the influence of social context into account in people’s assessment about their well-being. It implies that people prefer not only to have a high income level but also to have more than others (Carlsson et al., 2007). If relative income position has any effect on subjective poverty assessments, the improvement of subjective well-being requires reducing inequality in the society. If, however, the poor are too concerned with their everyday survival to take their relative position into consideration, policies focusing on the alleviation of absolute poverty can be justified. It is crucially important to reveal the differences between subjective and objective poverty assessments since even the best-designed policy intervention can fail because of ignoring the subjective assessment of well-being in poverty assessment (Fafchamps & Shilpi, 2008).

The so-called Easterlin paradox states that wealthier people tend to be happier than the poorer ones, but above a certain level of per capita average income (somewhere between US$10,000 and 20,000), there is no correlation between average income and subjective well-being (Easterlin, 1995). At the microlevel, however, positive correlations have been found between individual income and individual assessment of subjective well-being (Clark et al., 2008). Layard (2002) also stated that “once a country has over $15,000 per head, its level of happiness appears to be independent of its income per head” (Layard, 2002, p. 17). Ravallion and Lokshin (2002) also explored the lack of this relationship for Russia. Most of the Russian adults who feel that they are poor are not classified as such in official statistics, and most of the people who are classified to be poor do not feel that they are. Deaton (2010) also concluded that subjective assessment of well-being and income level does not correlate.

Easterlin (1974) analyzed the relationship between material and subjective well-being across countries and also within countries over time. He concluded that in case of wealthy countries, material well-being has little or no impact on subjective assessment of well-being in both cases. Other findings, however, indicated that wealthier people tend to be happier when the analysis is carried out within countries. Further studies revealed that these seemingly disconcordant findings can be explained by relative income comparisons (Stevenson & Wolfers, 2008).

Some studies about developed countries state that subjective well-being of individuals depends not only on their own standard of living but also on their relative income and relative deprivation. It means that higher earnings of the others are associated with lower level of well-being, controlling for the individual’s own income (Easterlin, 1995; Frey & Stutzer, 2002; Layard, 2002; Luttmer, 2005). A study on Nepal and Malawi, however, proved that relative position of the individuals has an effect on the subjective perception of poverty only among upper income households. The poor care only about absolute deprivation (Fafchamps & Shilpi, 2008).

Stevenson and Wolfers (2008) highlight that the existence of a satiation point is quite uncertain. They argue that the curvilinear nature of the relationship between the absolute income level and the subjective assessment of well-being can be eliminated by taking into account the logarithm of the average income level instead of its absolute value. When subjective well-being is examined in the function of the log income level, the nature of the relationship seems to be linear. They also highlight that there is less consensus about the degree to which objective and subjective well-being and poverty are correlated.

The fact that objective and subjective well-being are independent of each other implies that it is no more necessary to place the increase of material well-being (p.e. the promotion of GDP growth) into the focus of economic policy. In this case, government policy should focus on the maximization of subjective well-being (Stevenson & Wolfers, 2008).

Cross-References

Beliefs About Poverty

Poverty Lines

Poverty Measurement