The policy relevance of absolute and relative poverty headcounts: What's in a number?

Financial poverty indicators still play an important role in policymaking and evaluation. Countries such as the USA and the EU member states use one or several ‘official’ poverty indicators on which success of poverty reduction policy is regularly monitored. Whereas the US poverty indicator is based on an absolute concept of poverty, the EU Laeken indicator is based on a relative concept. But the consequences of such a decision are considerable. As absolute and relative poverty indicators reflect related but conceptually distinct approaches to determining insufficient levels of well-being; they can yield very different poverty statistics, particularly over time. In this paper, we use the official EU and US poverty indicators to study the policy relevance of using either an absolute or a relative indicator. We find significant differences between the poverty estimates in poverty rates as well as in the poverty profiles. Benefit incidence- and adequacy rates are equally estimated and compared. The paper concludes that the differences between the two poverty concepts is more than important enough to support monitoring poverty and the related social and economic policies, using both relative and absolute poverty indicators.