Hick, Rod (2014). 'Between income and material deprivation: In search of conversion factors' Paper presented at the annual conference of the HDCA, 2-5 September 2014, Athens, Greece.

In justifying the capability approach, Sen has argued that the claim in favour of conceptualising poverty in terms of people's capabilities rather than their resources lies not only in terms of focusing on what is intrinsically important to our lives rather than that which is merely instrumentally important, but also because:

 

  1. There is substantial variability in translating resources into capabilities (i.e. the existence of conversion factors); and
  2. There are many more influences on one's well-being other than one's resources.  (Sen, 1999: 87-8).

 

If these two claims are true, then information about a person's resources will be insufficient to reflect their capabilities. Sen argues the existence of conversion factors implies that we should either (a) focus directly on capability deprivation or (b) create an interpersonally-variant poverty line so that an income line can reflect 'command over capabilities' (e.g. Sen, 1983: 165).

 

Yet, given the fundamental role played by the conversion factors claim in motivating the shift to a capability-based analysis, it is remarkable that a greater number of studies which seek to identify conversion factors empirically do not exist. Indeed, acceptance that conversion factors do exist, at least in a form which renders income-centric analysis problematic, has not been universal, with Nolan and Whelan (1996) arguing that they play a relatively marginal role in the relationship between income and a material deprivation measure of poverty.

 

This paper seeks to contribute to the sparse literature on conversion factors by seeking not only to validate the existence and estimate the magnitude of conversion factors between income and material deprivation in the UK, drawing on data from the British Household Panel Survey, but also to assess their implications for poverty analysis and for the capability approach. The latter is crucial because, as we argue, the existing literature on conversion factors considerably simplifies both the nature and the sources of variation between resources and functionings, with important theoretical consequences.

 

Existing studies which seek to estimate conversion factors focus typically on one group – disabled people (e.g. Zaidi and Burchardt, 2003; 2005; Kuklys, 2005) – and focus overwhelmingly on current income as the relevant measure of resources (e.g. Lelli, 2005; Binder and Broekel, 2011). This paper extends existing analysis on both fronts - by analysing conversion factors for a broader range of groups than are typically considered and by estimating conversion factors using both a current and five-year average measure of income. We seek to estimate conversion factors using an 'equivalence scale' approach which identifies the income adjustments necessary to equalise the probability of material deprivation for different groups.

 

There are three main findings – two empirical, one conceptual. First, we demonstrate the importance of the time period over which income is measured in terms of the magnitude of the conversion factors which are estimated. It is found that conversion factors based on a five-year average of current income are 40-45 per cent lower than those based on current income itself.

 

Second, however, a conversion-adjusted income measure, whether based on current or five-year average income, still does not reflect 'command over capabilities' because conversion factors are estimated on the basis of group averages, while needs vary for different groups and different households. A conversion-adjusted measure of income results in an improved, but far from total correspondence between households' income and material deprivation profiles. This points to the importance of considering both within-group as well as between-group variation in terms the operation of conversion factors.

 

Third, we draw on existing non-capability-inspired research on the relationship between low income and material deprivation in the UK and Europe. This literature suggests that the differing needs which people have – the conversion factors explanation – is just one reason why people's incomes and deprivation status diverge. We suggest that greater consideration of the reasons for this divergence matters since not all of these alternative reasons are suggestive of constraints, and not all support a shift from focusing on people's resources (or means) to their capabilities (or ends).

 

Overall, then, the paper seeks to contribute to efforts to understand and estimate conversion factors by making both empirical and conceptual contributions. It argues that more clearly understanding the precise nature of the variation between people's resources and their functionings or refined functionings represents an important task for those working with the capability approach.