Choosing an optimal material deprivation indicator threshold

Severe material deprivation, a dimension of the poverty and social exclusion index, one of Europe 2020 Strategy headline indicators, is defined as enforced lack of at least four of nine specific items. Proposals for modifications in the indicator include the Material and Social Deprivation indicator which is based on an updated set of thirteen items, whereas the choice of the threshold was data-driven. This paper proposes a simple, yet a rigorous methodology based on the Youden index to set a threshold to classify individuals into 'deprived' and 'non-deprived' groups. Applying the Youden index to 2014-2018 EU-Statistics on Income and Living Conditions data suggests an optimal cut-off point of the value of 5. This is in line with the suggestions of the Indicators Sub-Group of the Social Protection Committee. The estimated rates of material deprivation based on the new indicator are 2.2-times higher on average than the current rate. Assuming that the newly proposed definition better reflects the true nature of deprivation in the EU, the aggregate measure of 'at risk of poverty or social exclusion' has been underestimated, as material deprivation is one of its three dimensions.