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The Role of Prices in Measuring the Poor's Living Standards

The Role of Prices in Measuring the Poor's Living Standards...

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The Role of Prices in Measuring the Poor’s Living Standards Christian Broda, Ephraim Leibtag, and David E. Weinstein A lmost 50 years after President Lyndon Johnson’s famous 1964 State of the Union speech that introduced the “War on Poverty,” two facts stand out in the current debate about poverty. First, since David Caplovitz (1963) wrote his path-breaking book, The Poor Pay More, numerous researchers have confirmed that the poor indeed pay more than households of higher income for the goods and services they purchase. Second, official poverty rates as measured by the U.S. Census have remained essentially flat since the late 1960s, raising questions about the success of the policies implemented to reduce poverty. In this paper we revisit these two facts by paying close attention to the price data underlying these findings. By examining scanner data on thousands of household purchases we find that the poor pay less —not more—for the goods they purchase. In addition, by extending the advances on price measurement in the recent decade back to the 1970s, we find that current poverty rates are less than half of the official numbers. This finding underscores the importance of correctly measuring the evolution of prices to determine the appropriate poverty thresholds over time. Both findings are contrary to the conventional wisdom established in the last few decades. We start by addressing the question of whether the poor pay more for the goods they buy. Since Caplovitz’s (1963) book, a number of papers have seemed to confirm his main thesis that the poor pay more. Surveys of food stores often y Christian Broda is Professor of Economics and Business, Booth School of Business, University of Chicago, Chicago, Illinois. Ephraim Leibtag is an Economist with the Economic Research Service, U.S. Department of Agriculture, Washington, D.C. David E. Weinstein is Carl S. Shoup Professor of Japanese Economy, Columbia University, New York City, New York. Broda is a Faculty Research Fellow and Weinstein is a Research Associate, both with the National Bureau of Economic Research, Cambridge, Massachusetts. Their e-mail addresses are [email protected] , [email protected] , and [email protected] . Journal of Economic Perspectives—Volume 23, Number 2—Spring 2009—Pages 77–97
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conclude that low-income households shop in stores with higher item prices. For example, Chung and Myers (1999) and Cotterill and Franklin (1995) have found that poor neighborhoods have fewer discount stores than the suburbs and there- fore poor people are likely to shop more frequently in higher-priced small conve- nience stores. However, no information about household expenditures by store type was used in these studies, and so it was impossible to quantify with any precision the magnitudes of these effects. Other papers have relied on survey data that only provide the unit costs paid for broad food categories by different income groups, rather than the actual prices paid for specific items (for example, Kaufman, MacDonald, Lutz, and Smallwood, 1997).
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