Low Income Cut-Offs: Necessary but Insufficient

Topic Box from the 2009 Ninth Annual Benchmark Report

There are three generally accepted measures of low income used in Canada. The Low Income Cut-Offs (LICOs), which are based on average consumption patterns; the Low Income Measure (LIM), built on median incomes; and, the Market Basket Measure (MBM), based on the cost of a basket of goods and services. 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 in PI22 - Low Income Cut-Offs. A relatively new approach, the Market Basket Measure (MBM) was recently updated and now features results for 2000 through 2007.

Low Income Cut-Offs (Income After Tax) LICOs are calculated based on the proportion of after-tax income an average Canadian family spent on food, shelter and clothing in 1992 (43%), plus 20 percentage points (to reach a standard of 63%). The cut-off lines are thus set at a point where a family would spend 63 percent of its post-tax income on these necessities. Lines for five different sizes of communities and seven family types across the country are generated each year. LICOs are 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 its 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 the 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 similar LICO-categorized cities, and therefore someone who lies just above the calculated cut-off may in reality be spending more than 63 percent 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. A more thorough review of LICO, “Low Income Cut-Offs: Necessary but Insufficient”, can be found on our website and in last year's benchmark report.

Market Basket Measure Under the MBM, a person is in low income if their disposable family income is insufficient to cover a basic basket of goods and services in their community. MBM thresholds are generated for various communities in the ten provinces for the reference family of two adults and two children. 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 MBM definition of low income has consistently produced a higher incidence than the after-tax LICO although the difference has shrunk considerably in recent years.

Sources: Statistics Canada, Low Income Cut-offs for 2005 and Low Income Measures for 2004, Cat. # 75F0002MIE-004, April, 2006; Human Resources and Skills Development Canada, Low Income in Canada: 2000-2007 Using the Market Basket Measure, August, 2009.

Low Income Incidence in BC, MBM and LICO