Theoretical Definition and Empirical Measurement of Welfare and Poverty: A Microeconomic Approach

Abstract

The focus of the paper is a theoretical discussion of welfare measurement on a micro level and of identification of poverty. The theoretical ideas will be illustrated by a description of empirical measures that were used in research on poverty and distribution and examples based on the European Community Household Panel (ECHP). This data set gives the possibility to calculate several poverty measures for relative income poverty, subjective income poverty and relative deprivation. Poverty can be, and in almost all cases it is (explicitly or implicitly), defined as a lack of welfare. On the basis of this very general definition, the paper shows first how welfare can be defined theoretically. For this purpose we use microeconomic household theory. Interestingly, there is a great parallelism between the way the production of utility or welfare is dealt with in microeconomics and the measurement of welfare and poverty in empirical distribution studies. In this theoretical framework the empirical possibilities of poverty and welfare measurement that can be found in the literature will be discussed, including own calculated results on the basis of the ECHP. Second, we take a look at the question of drawing the line. It will be described how this question is answered in empirical poverty research. Again, this will be commended with own calculations on the basis of the ECHP. This welfare theory based classification of poverty measures has the advantage that underlying assumptions of poverty measures can be discovered and that differences between and the advantages and disadvantages of different poverty measures can be seen and be discussed more clearly.

Keywords: poverty, welfare, measurement, ECHP

JEL Classification: D63, I3, I32