Bottom Incomes and the Measurement of Poverty and Inequality

Abstract

Incomes in surveys suffer from various measurement problems, most notably in the tails of their distributions. We study the prevalence of negative and zero incomes, and their implications for inequality and poverty measurement relying on 57 harmonized data sets from the Luxembourg Income Study and Economic Research Forum databases, covering 12 Mediterranean countries over the period 1995–2016. This paper explains the composition and sources of negative and zero incomes, and assesses the distributional impacts of alternative correction methods on poverty and inequality measures. It finds that the main source of negative disposable incomes is negative self-employment income, and that high tax, social security withholding, and high self-paid social security contributions account for negative incomes in some countries. Using detailed information on expenditure, we conclude that households with negative incomes are typically as well off as, or even better off than, other households in terms of material well-being. On the contrary, zero-income households are found to be materially deprived. Adjusting poverty and inequality measures for these findings can alter these measures significantly. © 2021 International Association for Research in Income and Wealth.