Geographic cost of living adjustment of poverty rates

Article type: Research Article

Authors: Khandker, Rezaul K.^{a; *} | Mitchell, Janet B.^b

Affiliations: [a] Manager, Health Economics SmithKline Beecham Pharmaceuticals 1250 S. Collegeville Road - UP4205 Collegeville, PA 19426, USA | [b] Center for Health Economics Research 411 Waverly Oaks Road, Suite 330 Waltham, MA 02452, USA

Correspondence: [*] Tel: +1 610 917 7637; Fax: +1 610 917 4818; E-mail: Rezaul_K_Khandker@sbphrd.com

Abstract: In this paper, we develop a method for adjusting poverty rates for geographic differences in cost of living. Although interarea differences in cost of living affect consumers in terms of their buying power, poverty rates and federal assistance guidelines have not been adjusted for these differences. Without such adjustment, poverty rates are underestimated in high cost areas and overestimated where cost is lower. Using estimates of area cost-of-living indices and data on income distribution, we adjusted poverty rates assuming log-normal and Pareto income distributions. Poverty rates were compared with and without cost-of-living adjustment for major U.S. cities. We found that poverty rates among Medicare beneficiaries are considerably lower when we adjust for geographic cost-of-living differences.

DOI: 10.3233/JEM-1998-0157

Journal: Journal of Economic and Social Measurement, vol. 25, no. 1, pp. 1-13, 1998