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Poverty, Prices and Place: How Sensitive is the Spatial Distribution of Poverty to Cost of Living Adjustments?

August 2004

Dean Jolliffe, Economic Research Service, U.S. Department of Agriculture.

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This paper uses a spatial price index based on the Fair Market Rent (FMR) data to examine how accounting for cost of living differences across metropolitan and nonmetropolitan areas affects measured rates of poverty. The headcount, poverty gap, and squared poverty gap measures from the Foster-Greer-Thorbecke family of poverty measures provide comparisons of measures that vary in degree of sensitivity to changes in the income distribution of the poor. In every year since the Federal government began tracking poverty, the headcount measure has been higher in nonmetro than metro areas. The metro-nonmetro difference in poverty has been significantly less pronounced when considering the squared poverty gap measure indicating that disproportionately more of the nonmetropolitan poor subsist on incomes near the poverty line. The Fair Market Rents index is approximately 20 percent lower in nonmetro areas than in metro areas and using this index to adjust income for spatial price differences results in a complete reversal of nonmetro-metro poverty rankings over the three measures from 1991 to 2002.

Poverty Trends and Measurement, Rural Poverty, Urban Poverty