As a contribution to Anti-Poverty Week this year, I have invented a new economic concept: the Vegemite Curve.

Economists like curves. There is:

• The Phillips Curve to tell us about the relationship between inflation and unemployment, except when it didn’t – e.g. 1970s;
• The Laffer Curve to tell us how lowering taxes can raise revenue – except when it doesn’t;
• The IS-LM curve to tell us about key macroeconomic relationships, except when it is applied to the real world;
• Piketty’s elephant curve to tell us by how much the rich have been getting richer; and most obviously,
• there are the ubiquitous supply and demand curves of neoclassical mircoeconomics which tell us the outcomes of the actions of utility-maximising automatons.

My curve will never be as famous as any of these curves, but it is based on the real-life economics of people in poverty in Australia. It is a graphic representation of a poverty premium – an extra cost that accrues to people in poverty precisely because they are in poverty. If money makes money, then it is equally true that being poor costs more.

The Vegemite Curve

While there are a range of different types of poverty premiums, the Vegemite Curve illustrates the costs of not being able to afford the initial outlay to buy commodities in bulk. It is constructed simply by plotting the unit cost (per 100g) of different size jars of vegemite, and it clearly shows how the unit cost increases with smaller jar sizes. Here it is:

The Vegemite Curve is not exactly revolutionary – it is standard business economics based on economies of scale, but it does mean that if you can only afford the smallest size jar in your weekly shop, you end up paying 59% more per unit than if you could buy the biggest size.

And as with any economic analysis, it is easy to combine hard data with a few assumptions and calculate a bottom line: in this case, if you are limited to buying the small jar, over a year your total expenditure on Vegemite would be $38.50 more than if you had the money to buy the bigger size. Perhaps not a lot of money, but when the principle of Vegemite Curve is applied to most items in a weekly shop, the impact on those in poverty is significant.

The Vegemite Index

When the Vegemite Curve went through SACOSS’ internal processes, it became an index! This transition was simple in mathematical terms and produced the same shape curve (below), but it was mildly disappointing for me. In economics, curves are causal while indexes are incidental. For example, if you move a supply curve you change the price and demand, while an index like the CPI simply registers the price change after the fact. However, the Index label is probably fair enough given that we were not claiming that Vegemite causes poverty!

Implications

The Vegemite Index could have significant ramifications for economics and social policy. It could challenge the costings of Henderson style poverty lines or minimum budget standards, because the average costs of items may be higher for those on low incomes. Similarly it could challenge the appropriateness of the 50% of median income poverty line because the relationship between income and living costs is different for those on different incomes. And perhaps it changes the income elasticities in the demand for impacted items, and creates a different demand curve for poor people.

But in reality, it probably does none of those things!

A bit like some of the curves I mentioned at the top, its explanatory claims are exaggerated. However, what the Vegemite Index does do is to highlight a real and important poverty premium for people living in poverty. They not only have less money than other people, they also have relatively higher living costs – and this can be illustrated in the consumption of an iconic everyday product. Giving it the pretence of an economic “curve” or index is just fun to help get some attention to the issue – and it worked in getting some TV and radio coverage, even getting Allan Kohler’s attention on ABS News’ Finance Report.

But beyond grabbing some media attention, the real point of the Vegemite Index is to use the media attention to argue for government policy responses to address poverty premiums. The SACOSS Anti-Poverty Week Statement highlights a range of ways governments and institutions can address different poverty premiums, but in relation to buying in small quantities, it is hard to directly reduce the poverty premiums because they reflect standard economies of scale. Accordingly, the response needs to be on the income side – which in effect means that the Vegemite Index is yet another reason why we need to raise the rate of the hopelessly inadequate social security payments like JobSeeker and Youth Allowance.

Simple!

Finally, BTW, alongside the Vegemite Curve, I also invented a litter line graph and uncovered some invisibility cloaks hiding the impacts of ambulance charges. But that is a story for another day!