The Analysis of Poverty Data with Endogenous Transitions

This paper argues that much interpretation of standard poverty data is flawed. It is common to analyse poverty data broken down by household or economic status. Implicitly it is assumed that people move between different states (for example, single, married, children, no children, etc.) for exogenous reasons. If we allow some economic behaviour into the problem, then such transitions become endogenous and this has implications for modelling. The data are then insufficient to identify the claims made from them. Given that transitions between such states depend on individual characteristics and the parameters of the processes, then the distribution of the characteristics of the individuals in the states will be endogenous. The state average poverty rate will depend on the composition of the individuals in the state as well as the economic impact of being in that state per se. In this paper we (i) illustrate that this analysis is wide-spread among academic work and policy-makers; (ii) set out a simple model with endogenous transitions to make our point, (iii) provide some simulations to show the way this works, and (iv) apply this to FES data for Britain. We show that our argument has empirical content for Britain.