Low Income Incidence Measures

Topic Box from the 2006 Sixth Annual Benchmark Report

There are several accepted measures of low income used by Statistics Canada to gauge the proportion of a population in a particular area living below a defined income threshold, and to compare the incidence of low income across demographic groups (e.g. individuals under 18, elderly families and lone-parent families, both male and female-led). The Low Income Cut-Off or LICO is the most established measure, and the Progress Board currently uses it as a component of its Social Condition Index. BC's LICO performance is detailed on the previous page. A new approach, the Market Basket Measure (MBM) was recently developed, though MBM results are available for only the 2000 through 2002 period.

Low Income Cut-Offs (Income After Tax)
The LICO is calculated based on the percentage of after-tax income an average Canadian family spent on food, shelter and clothing in 1992 (44%), plus 20 percentage points (to reach a standard of 64%). To come up with dollar amount cut-off lines, these percentages are applied to incomes and expenditures for 5 different sizes of communities and 7 family types across the country. LICOs are thus relative measures – low income incidence is based on how much income a family or individual spends on food, clothing and shelter relative to what the average family spends.

LICO has been criticized because of this relative nature (it is possible for the incomes of all to improve, but the LICO rate to stay the same) and because it doesn't take into account regional differences in cost of living, as adjustments are made for size only. This means LICO may underestimate low income proportions in areas where food, shelter and clothing costs are higher relative to a similar size city or town elsewhere; for example, costs of living in Vancouver are higher than in many similarly LICO-categorized cities, and therefore someone who lies just above the calculated cut-off may in reality be spending more than 64% of their income on the essentials. The LICOs for BC may then be too low, while those for places like Manitoba may be too high.

Market Basket Measure
In contrast to LICO, the MBM calculates low income as those whose disposable income is insufficient to cover a basic basket of goods and services, priced by community size in each province (e.g. rural Ontario), or by individual urban areas (e.g. the Vancouver CMA). It is thus a regionally specific, absolute measure – if real incomes of all citizens rise at the same rate, the MBM would decrease, as more people would be able to cover the cost of the MBM basket. The disposable income considered for the MBM measure is not just after-tax income (as per the LICO measure) but is calculated by subtracting from family after-tax income payroll deductions such as union dues, pension and health care plans, child care payments and medically-prescribed but unfunded health expenses (e.g. dental and vision care). The MBM basket includes food, shelter, and clothing, as well as transportation, communication, reading, recreation and entertainment goods and services.

Sources: Statistics Canada, Low Income Cut-offs for 2005 and Low Income Measures for 2004, Cat. # 75F0002MIE-004, April, 2006; Human Resources and Social Development Canada, Low Income in Canada: 2000-2002 Using the Market Basket Measure, June, 2006.