Earnings Capacity

Whether or not a household is counted among the poor depends upon its annual money income. As a measure of economic status, however, annual money income has serious limitations. In this paper an alternative indicator of economic status, called earnings capacity, is developed. Earnings capacity is designed to measure the ability of a living unit to generate an income stream if it were to use its physical and human capital at capacity. Using this measure, the composition of the poverty population is estimated and compared to the composition of the poverty population according to the official definition. In addition, the socioeconomic and demographic determinants of poverty as measured by earnings capacity and by annual money income are compared and contrasted.