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ECONOMIC WELL-BEING
INCOME AND EARNINGS OPTIONS DOCUMENTS
DOMAIN AND CONSTRUCTS DEFINITIONS AND JUSTIFICATION
Domain
Economic Well-Being
Definition
For this project, we define the domain “economic well-being” broadly to include all aspects of an individual, family, or household’s economic circumstances. In a paper prepared for the U.S. Department of Health, Education, and Welfare, Thomas (1977) defines economic well-being as an economic unit’s “ability to demand goods and services, in relation to its needs” (p. 165). Economic well-being should not be confused with the broader concept of well-being itself, which encompasses additional domains such as psychological, social, and physical well-being. But because an individual’s well-being in one area is often influenced by his/her condition in another area, the domain of economic well-being takes on greater importance than it might otherwise have (Citro & Michael, 1995). Because economic well-being covers all factors that can be used to describe a household or family’s economic condition, the domain includes diverse constructs such as characteristics of employment (e.g., retention, stability, number of hours worked, job advancement), earnings, income, poverty variables (e.g., federal poverty threshold), barriers to employment (e.g., transportation), job skills and work experience, welfare receipt, economic hardship (e.g., food insecurity), and unemployment.
Global Justification for Selection of Domain
Economic well-being has a critical impact on the overall well-being of all family members, and low-income children are especially vulnerable to economic difficulties (Lugaila, 2003). A recent study by the U.S. Census Bureau examined the relationship between family income and a wide variety of child well-being indicators. According to the study, for example, economic well-being is significantly related to children’s educational experiences. Specifically, children with family incomes below the poverty level were significantly less likely to attend gifted classes and more likely to have repeated a grade than children with family incomes at or above 200 percent of the poverty level. Moreover, low-income parents had lower educational expectations for their children than did high-income parents, and their children were much less likely to participate in sports, clubs, or lessons than their high-income counterparts. Furthermore, children from high-income families were more likely to be read to than children of low-income families (Lugaila, 2003).
The domain of economic well-being is clearly important to the nine evaluations and to the improvement of the lives of low-income children and families more generally. Because of this importance and because this domain is well aligned with the expertise, strengths, and interests of the Work Group, we are making it the focus of one of our options documents. Of the various economic well-being constructs listed above, we will specifically look at the constructs of income and earnings. These constructs were chosen because of their overall importance to the domain and to the ACF evaluations and because of the methodological concerns with the income and earnings constructs that make finding an appropriate way to measure them even more important. These justifications are explained in further detail in the next section.
Constructs
Income and Earnings
Definition
In their recent article on how best to measure economic characteristics of households, Duncan and Petersen (2001) define household income as “the sum of income from all sources received by all members of the household over some time period, typically the calendar year or month prior to the interview. When combined with a measure of household wealth…a household’s income measures its command over material resources” (p. 249). Labor-market earnings (which are included in the income construct, as explained below) are “the sum of income an individual receives from an employer or from all employers over some time period, typically the calendar year or month prior to the interview. Earnings of self-employed individuals are somewhat problematic, since business revenues are a mixture of returns to the individual’s labor as well as capital investments” (Duncan & Petersen, 2001, p. 250). The definitions we use for the income and earnings options documents are intentionally broad. The following points explain this intention:
- Although income and earnings are separate constructs under the economic well-being domain, we have decided to consider both of them in these options documents. Several considerations prompted this choice: 1) The income construct includes the earnings construct; it is impossible to accurately measure a household’s income without considering the sum of its members’ labor-market earnings, and many surveys ask questions about both concepts anyway. 2) A focus on earnings would not truly capture the economic well-being of low-income families. Such families typically receive income from a variety of sources other than just earnings (e.g., unemployment, workers’ compensation, supplementary security income, public assistance, regular financial assistance from friends or relatives).
- Looking at only cash sources of income, though, is insufficient to measuring whether low-income families have sufficient financial resources to meet all of their needs. A truly accurate income construct must look both at other sources of income and at household expenditures. 1) Because of the importance of measuring all material supports low-income families take advantage of, the income construct includes various non-cash sources of income, including food stamps, school lunches, health insurance, energy assistance, and subsidized housing. Our broad emphasis on all cash and non-cash income sources of a household or family thus allows us also to explore some aspects of the Welfare Receipt construct identified by the Work Group. 2) To understand the amount of income actually available to a household to meet its needs, one must look at net income. In other words, one needs to look at the expenditures and other deductions from income that prevent a household from taking full advantage of all of its received income. Questions on deductions from income are still fairly rare in income measures, but sometimes one will find questions on surveys about taxes, housing or child care costs, or payments for child support or medical care (Citro & Michael, 1995; Ribar, 2003).
- Although the definitions we use are intentionally broad, it is important to stress that the measures of income and earnings discussed in these options documents are not by themselves adequate to determining a household or family’s economic well-being. To understand all of the material resources available to a household to meet its needs, one also must ask questions from the wealth construct. A household’s possession of wealth can allow it to compensate for irregularities in the receipt of income, and measures of wealth often play an important role in determining program eligibility. But even looking at both income and wealth can ignore the varied circumstances in which households or families find themselves. A low-income family’s economic well-being is dependent on a wide variety of other factors not related to their financial capabilities, including household composition, cost of living, quality of amenities and social services, and time available to care for children or enjoy the fruits of its labor. The two constructs of income and earnings can tell us much about a low-income family’s economic circumstances, but one must look beyond the measures presented in these options documents to get a fully accurate sense of the ability of a household to meet the needs of the children who live in it (Citro & Michael, 1995; Ribar, 2003).
Global Justification for Inclusion of Construct
Income and earnings are an important measure of an individual, family, or household’s socioeconomic status and—combined with household wealth—form the best explicit measure of a family’s economic well-being. Both constructs are also used frequently to determine other economic classifications; for example, the United States derives the poverty level based on income, and many government programs require possession of earnings for eligibility. The Work Group recognized the necessity of using these constructs to judge the economic well-being of low-income families because income and earnings are the only economic well-being constructs to be measured by all nine ACF evaluations.
But despite the clear value of obtaining accurate data on an individual or household’s income and earnings, prior experience has shown that doing so poses substantial methodological complications. Survey respondents are more likely to refuse to answer questions about income and earnings, and recall problems and concerns about respondents’ truthfulness could make the data that are obtained unreliable. Some survey designers even fear that a refusal to answer income and earnings questions may cause respondents to decline to participate in a survey entirely. None of these problems are insurmountable, but overcoming them requires careful attention to the design and administration of the survey (Duncan and Petersen, 2001). Subsequent analyses of income and earnings data also require special care because the high frequency of item nonresponse often necessitates the use of imputation procedures for missing data (Ribar, 2003). By looking closely at the methods and success with which different surveys measure the constructs of income and earnings, the EDCP can make a valuable contribution to improving the quality of data obtained for the economic well-being domain.
References
Citro, C., & Michael, R. (1995). Measuring poverty: A new approach. Washington, DC: National Academies Press. URL: http://www.nap.edu/books/0309051282/html/index.html
Duncan, G. J., & Petersen, E. (2001). The long and short of asking questions about income, wealth, and labor supply. Social Science Research, 30, 248–263.
Lugaila, T. A. (2003). A child’s day: 2000 (Selected indicators of child well-being). Current Population Reports, P70-89. Washington, DC: U.S. Census Bureau. URL: http://www.census.gov/prod/2003pubs/p70-89.pdf
Ribar, D. (2003, October). Money isn’t everything. Presentation made to Evaluation Data Coordination Project Second Work Group Meeting, Washington, DC.
Thomas, R.W. (1977). A review of income concepts used in economic analysis. Washington, DC: U.S. Department of Health, Education, and Welfare. URL: http://aspe.hhs.gov/hsp/Inc-Concepts77/inc-con-main.htm
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