The Problems With LICO

Chris Sarlo

[This is part 2 of a two--part examination of the way poverty is defined and measured. The May instalment looked at the two approaches to defining poverty and Statistics Canada's position on the issue. In this issue of Forum, I critically evaluate Statistics Canada's Low Income Cut--Off (LICO), the gauge most often used to measure poverty in Canada.]

Canada has no official poverty line. Statistics Canada has, on several recent occasions, emphasized that its Low--Income Cut--Off (LICO) is not a poverty line and should not be interpreted as such. Despite this formal near--repudiation of LICO as a poverty line, social welfare activists, many reporters, and some academics continue to use the LICO as if it were an official poverty line.

Why should we be concerned about this? What is the cost of using a well--known measure such as LICO as a poverty line? Is there really a useful distinction between “poverty” and “low--income”?

The concept of poverty is very important. My own view is that it is not the same as “low--income”. I regard the term “low--income” to be too ambiguous and too flabby. Poverty is a strong term. It means more than just having a “low--income”. It connotes a sense of real deprivation.

So what is wrong with LICO?

First, LICO is far too complex to be a useful poverty line. Most people, including academics, don't have the foggiest notion of how LICO is constructed and how it is rebased. This leads to frequent misinterpretations in the media and in some policy documents. One recurrent error is that LICO is that level of income at which people are unable to afford the basics: food, shelter and clothing. Some concepts are intrinsically complex and require, of necessity, indirect and convoluted measurement. That is not the case with poverty. Poverty is a state of serious deprivation. It should be possible to translate that concept into a fairly straightforward statistical measure that almost everyone can understand.

Second, LICO is a relative measure. It is intimately related to average living standards through its connection to average consumption of a given basket of commodities through the process of occasional rebasing. This means that the LICO lines rise with living standards, although, perhaps, not at the same rate. The difficulty with a relative “poverty line” is that real growth in living standards does nothing, by itself, to reduce the extent of poverty. As long as everyone remains in the same relative position, as they would with across--the--board growth, there has been no reduction in relative poverty, no matter how well off people become in absolute terms. What matters in measuring relative poverty is the extent of inequality in society. This, I would argue, is not a useful way to measure poverty.

The difficulty with a relative “poverty line” is that real growth in living standards does nothing, by itself, to reduce the extent of poverty.

Third, the LICO lines are simply too high to be believable poverty lines. In 1997, the LICO for families of various sizes in large urban communities (where about half of Canadians live) were: for a family of one, $16,318; for two, $22,117; for three, $28,115; for four, $32,372; and for five people, $35,368. These are by no means “high” incomes, but they do not correspond to common sense notions of “poverty.” Let us take, for example, the single unattached individual earning $16,000 in the most expensive urban market in Canada, Vancouver. The average rent of a one bedroom apartment in Vancouver in October 1997 was $673 per month, or $8,076 per year. Our single wage earner has just under $8,000 left for food, clothing, and other necessities, including income taxes, net of tax credits. He is not living extravagantly, but is hardly impoverished. Earning the same amount in other major urban centres makes the poverty label even more unbelievable. In Ottawa, this person would have $8,700 for non--shelter needs; in Calgary, he would have almost $10,000; and in Montreal, $10,600. For a family of three, earning $28,000 and renting an average two bedroom apartment, the amount left over for non--shelter needs are: Vancouver, $17,728; Ottawa, 19,228; Calgary $20,236; and Montreal, $21,964. Again, not luxury, but not poverty either. Yet most studies and most media reports refer to these households as living in poverty.

. . . it is a lot easier to be “low income” now than it was 38 years ago.

The original LICO values for 1960, calculated by Statscan researcher Jenny Poduluk were: for a family of one, $1,500; for two, $2,500; for three, $3,000; for four, $3,500; and for a family of five people, $4,000. At that time, Poduluk regarded these as incomes below which people were likely to be in “straightened circumstances.” In 1997 dollars, these values would be: for a family of one, $8,775; for two, $14,625; for three, $17,550; for four, $20,475; and for a family of five, $23,400. On average, these estimates of the real value of what was considered “low--income” in 1960 are about 60 percent below current LICO values. In other words, it is a lot easier to be “low income” now than it was 38 years ago. To be sure, income taxes, which are not included in the consumer price index, are proportionately higher, even for low--income households, than they were in the 1960s. However, rising living standards account for much of the upward drift in this relative measure.

The final and perhaps most egregious problem with LICO is that it takes no account of different costs in the different communities and regions of Canada. We have the same low--income cut--off for Vancouver, for example, as for Montreal. This is clearly absurd when the average rental accommodation in Vancouver in 1997 cost about 60 percent more than in Montreal. Rental accommodation is almost always the largest item in the budget of low--income households. LICO only varies with family size and the size of the community. It completely ignores cost of living differences between communities.

The approach I have used defines poverty as the inability of a person or family to acquire all of their basic needs. The poverty line is therefore the sum of the costs of the basic necessities for that person or family. This is a simple, easy--to--understand concept, and one which conforms to the standard definition. My poverty lines directly incorporate actual costs of living in the various cities and regions of Canada.

Rental accommodation is almost always the largest item in the budget of low--income households. LICO only varies with family size and the size of the community. It completely ignores cost of living differences between communities.

Statistics Canada should consider retiring LICO. Given the major problems with this measure, it is hard to imagine why any serious scholar would use it, and even harder to imagine why Statistics Canada would continue to construct and release (with much ballyhoo) so flawed a measure. Our world renowned statistical agency needs to start over and determine how to construct real poverty lines. It is regrettable that we do not, by now, have reliable information about the number and proportion of impoverished Canadians.

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Last Modified: Wednesday, October 20, 1999.