Study 2011 – The phenomenon of “double penalty” in poverty

Initially published in 2011, the Boston Consulting Group realized this study – a pro bono work for the Action Tank in February-March 2011 on the basis of a 2008 INSEE survey on household income and consumption

The phenomenon of “double penalty of poverty” is not new or complex. The financial burden on low income people is related to their tight budget issues whereas the double jeopardy of poverty implies that these people pay more than better-off households for the same goods and services (per consumption unit).

Key objectives

  • Define and quantify the “double penalty impact” on the poor households income
  • What are the underlying reasons for this phenomenon and how to fight against it and  minimize its impact
  • Raise the awareness of the businesses on the need to offer new incentives

What is the “double penalty” of poverty?

Unavoidable expenditure for poor people (rent/ loan, housing costs, insurance, taxes) and the needed one (food, transport, communication, health) accounts for almost 70% of their total income, the rest spent in what is can be called “arbitrable expenditure” (clothes, recreational spending, furniture and interior layout…etc). They don’t have any saving capacity

The estimation of the average price of a certain amount of products and services for an average household below the poverty line/ a low income household pays (18 500 euros per household with one children) compared with the prices a medium income household pays (40 000 euros /year with one children) gave evidence that :

  • Prices variations on the price per square meter (annual renting) of 52 euros (for low income household) vs 45 euros
  • Gaz prices are higher (89.6 euros) vs 84,90 euros
  • Home insurance premium rates are higher : 96 euros/ room vs 80 euros
  • One hour of mobile phone is more expensive : 19 euros vs 15 euros (the use of prepaid mobiles and no mobile plan with a specific 12 months/ 24 months commitment etc)

The total amount of this double penalty of poverty is between 1000 euros & 1100 / a year, for the 7 spending items we focused on, that is between 9% and 10% of their annual income (not to mention the fact it prevents low income consumers from saving capacities)

These results must be adjusted to the populations real size (not all of the poor populations use prepaid mobile cards)and compensatory mechanisms such as social energy tariffs for example must be taken into account. However, the real impact of this phenomenon is hundreds of euros every year for hundreds of thousands of poor households who income is close to the poverty line

Underlying causes

5 key factors explain the double penalty of poverty phenomenon :

– An adverse cost structure : the unit price for companies is higher for small quantities low income people purchase. Prepaid mobile cards are the best example of this situation; it is more expensive to sell prepaid cards each month( because of the delivery expenses in particular) than a 12 or 24 commitment with a mobile phone company for a calling plan

– An adverse price structure : the pricing mechanism doesn’t favour low income families, despite of the small amount of energy consumed : gaz prices are based on fixed-price subscriptions

– Supply and demand : the market price per unit affects low income families  : in the housing sector for example, the imbalance between supply and demand leds to an increase of the square meter cost for small flats compared to big ones

– Lack of facilities (car/ Internet/ bank) or unappropriate risk profile with a limited access to products and services and to cost-effective offers, for housing insurance for example

– A lack of hindsight due to a lack of information, which leads to subscribe to unappropriate contracts (consumer loans, consumer credits)

It is possible, for each of these items, to spot the main expenses items and minimize their negative effects : the adverse price structure is a cost burden for some housing expenses (energy expenses). Redesigning the pricing policy to avoid its negative effects on poor consumer (for the same impact a better off households) no matter the amount of energy consumed