What is poverty and why should we care about it? The literature uses different concepts of poverty, although a common definition is that poverty exists when people lack the means to satisfy their basic needs. The latter can be defined as those necessary for survival or more broadly as reflecting the minimum acceptable standard of living in a given society. Adequate access to goods and services is crucial to be healthy, succeed in school, and the labor market. For instance, McLaughlin and Rank (2018) find that the annual aggregate cost of U.S. child poverty amounts to about 5.4 percent of GDP, reflecting the loss of economic productivity, increased health and crime costs, and increased costs as a result of child homelessness and maltreatment. Given the high societal and individual costs, accurately gauging the extent of deprivation and understanding the causes of poverty is crucial, including to efficiently allocate federal, state, and local funds.

There is no consensus on how best to measure poverty. The U.S. official poverty measure compares a family’s income to a poverty threshold that is based on three times the cost of a specific food basket in the 1960s indexed by overall inflation for urban consumers. More recent studies have argued that consumption-based measures of poverty—that draw on household expenditure surveys and attach a consumption equivalent to the value of government assistance—provide a more accurate picture of poverty (Meyer and Sullivan (2012a,b, 2013, 2019)). Consumption based measures can (i) capture non-cash benefits; (ii) account for savings; and (iii) be more accurate (since consumption outcomes are typically better measured for lower income households than income). In addition to absolute measures, there are relative poverty indicators, which measure the share of the population with income or consumption below some percentage of the median.