From struggle to strain: effects of financial distress on household vulnerability to poverty

Abstract

Purpose

This study explores the impact of financial distress on household vulnerability to poverty in Canada. Previous studies primarily focus on assessing financial stress using one or two indicators, such as mortgage and non-mortgage debt. Moreover, there is limited discussion on the association between financial distress and poverty dynamics. Households that are currently non-poor may become poor in the next period and vice versa. Our objective is to explore the presence of financial stress, poverty dynamics and their associations in Canada.

Design/methodology/approach

We construct a Financial Distress Index utilizing five important financial indicators and employ Polychoric Principal Component Analysis (PPCA). Our index is rescaled to a bounded range of 0.1–1, where higher numbers reflect more financial stress. Additionally, we develop a vulnerability to poverty matrix based on households' socioeconomic characteristics. We employ both fractional probit and a dichotomous probit model to examine how financial distress and other factors could influence poverty dynamics in Canada.

Findings

Our quantitative analysis suggests that among Canadian households, higher financial distress raises the risk of falling into poverty or remaining below the poverty threshold in the future. A one-unit increase in financial distress corresponds to a 17% higher likelihood of vulnerability to poverty. Additionally, age, gender, education, family size, family type, employment, source of income, assets and type of assets are significant predictors of vulnerability to poverty in Canada. Interestingly, the relationship between education and vulnerability to poverty is not linear.

Originality/value

The literature examining the link between financial stress and poverty is scant for developed countries, and Canada is no exception. However, our study uniquely contributes to the literature by developing a Financial Distress Index and measuring its influence on poverty dynamics in Canada.

Peer review

The peer review history for this article is available at https://publons.com/publon/10.1108/IJSE-12-2023-0977.

Citation

Islam, K. and Chowdhury, M. (2024), "From struggle to strain: effects of financial distress on household vulnerability to poverty", International Journal of Social Economics, Vol. ahead-of-print No. ahead-of-print. https://doi.org/10.1108/IJSE-12-2023-0977