Degrees of vulnerability to poverty: a low-income dynamics approach for Chile

I propose an empirical framework to identify different degrees of vulnerability to poverty using two vulnerability lines that classify currently non-poor people into risk groups: high, moderate and low risk of falling into poverty in the next period. The latter corresponds to the income-secure middle class. My approach features two contributions. First, it extends the latest research on vulnerability to poverty, introducing a new subdivision among the vulnerable group that would be useful, in practice, for public policy objectives. Second, it uses two models to predict both poverty entry probability and household income as part of the estimation procedures. The former controls for initial conditions effects and attrition bias and the latter addresses the retransformation problem. I apply my approach to Chile using longitudinal data from the P-CASEN 2006–2009. The vulnerability cut-offs obtained (using the poverty line for upper-middle-income countries) are for the low vulnerability line $20.0 dollars per person per day and for the high vulnerability line $9.9 dollars pppd (both in 2011 PPP). My vulnerability lines differ significantly from those estimated in earlier research on vulnerability and the middle-class in Latin America. I argue that the previous research has underestimated the size of the population that is vulnerable to falling into poverty and has overestimated the growth of the middle-class. Misclassifying the vulnerable as middle-class limits their chances of accessing to anti-poverty protection policies.