# **_Arguments for relative poverty lines_**

While most developing countries use the absolute lines described in the last section, most OECD countries have taken a very different approach, whereby poverty lines have often been set as a constant proportion—typically 40-60%—of the mean or median.<sup>24</sup> For reasons that will soon be clear, I shall call these strongly relative poverty lines.

Two main arguments have been made in support of relative lines. The first views the poverty line as the cost of the poverty level of utility (as discussed in section 2) and argues that people attach value to their income relative to the mean in their country of residence. While the idea that utility anchors poverty lines is not common in applied work, it is consistent with a strand of the literature on welfare measurement in economics whereby cost-of-living indices and equivalence scales are anchored to some reference level of utility (as discussed above).

The second argument says that poverty lines should allow for differences in the cost of <u>social inclusion, which can be defined as the expenditure needed to cover certain commodities</u> that are deemed to have a role in assuring that a person can participate with dignity in customary social and economic activities.<sup>25</sup> This argument does not require that social inclusion is a (direct or indirect) source of utility. But it is seen as a desired capability for not being deemed “poor” in a specific context. So this can be thought of as a further example of the functionings approach discussed in section 2. Relative poverty in the income space is then seen as the logical implication of absolute poverty in the capability space.

The idea that certain socially-specific expenditures can be deemed essential for social inclusion is long-standing. Famously, Adam Smith (1776, Book 5, Chapter 2, Article 4) pointed to the social-inclusion role of a linen shirt in eighteenth century Europe: “A linen shirt, for example, is, strictly speaking, not a necessary of life. The Greeks and Romans lived, I suppose, very comfortably though they had no linen. But in the present times, through the greater part of Europe, a creditable day-labourer would be ashamed to appear in public without a linen shirt, the want of which would be supposed to denote that disgraceful degree of poverty which, it is presumed, nobody can well fall into without extreme bad conduct.”

> 24 Examples for OECD countries include Smeeding et al. (1990), Atkinson (1998), Saunders and Smeeding (2002), Fouarge and Layte (2005), Eurostat (2005), Nolan (2007) and OECD (2008, Chapter 5). There has been some debate about whether the poverty measure should be anchored to the mean or the median (Saunders and Smeeding, 2002; Easton, 2002; de Mesnard, 2007). Poverty lines set as a constant proportion of the median can have perverse properties when the Lorenz curve shifts, as shown by de Mesnard (2007).

> 25 It can be granted that “social inclusion” is a broader concept than this definition allows, and may well require more than commodities, including, for example, freedom from discrimination according to gender or ethnicity. However, the concern here is with the measurement of poverty in terms of command over commodities.

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