Poverty Measurement

This report provides information on the statistical data requirements that would be needed to construct a cost-of-living index that could be used, at the federal level, to adjust for geographic differences in living costs. Concerns had been raised in Congress that current measures do not recognize that residents of high-cost areas may need higher incomes to meet their basic needs. GAO (1) describes the function of market baskets in determining a cost-of-living index, including both a uniform national market basket and market baskets that reflect regional differences in consumption; (2) identifies methodologies that might be used to calculate a cost-of-living adjustment, including methodologies that researchers and private industry use for comparing costs by geographic areas; and (3) presents expert opinions on the ability of these methodologies to adjust the poverty measurements for geographic differences in cost of living.

GAO found that: (1) the current measurement to determine poverty levels does not account for geographic COL differences; (2) market baskets, a measure used to evaluate relative economic standing, would provide the foundation for any measure of living costs; (3) obtaining a consensus on what should go into a market basket for a COL index would be difficult; (4) there are 12 methodologies that could be used to contribute to an index to adjust the poverty measurement to reflect geographic differences; (5) the methodologies include budgeting for representative market baskets, measuring consumer spending norms, examining housing data, family budgets, or consumption data, developing various geographically specific price indexes, polling, calculating the relative amounts of time worked for each of the components of compensation, and estimating or modelling; and (6) experts' opinions about the methodologies' strengths and weaknesses were diverse and sometimes conflicting.