Chapter 22: Poverty

Absolute Poverty

the situation where a population are unable to meet its bare subsistence needs (food, clothing and shelter) to maintain a minimum level of living.

Who’s considered to be in absolute poverty?

Those who live below the International Poverty Line ($2.50 a day)

What is the problem with measuring poverty using the IPL

• normative decisions have to be made about what are ‘necessities of life’

  • This can occur even in just one country as what is inhumane to live without today could’ve been a luxury back in the day

• The extent of poverty over/under the line isn’t captured

Relative Poverty

a condition where a household's income or disposable income is significantly lower than the typical or median income in its own country. Generally, people are considered to be relatively poor if they earn below 50% or 60% of the national median.

Neither absolute nor relative poverty…

… reflects WHERE the poverty is. For example:

• between regions (north/south)

• genders

• rural/urban areas

Poverty Cycles

k

minimum wage

the minimum amount of remuneration that an employer can legally pay a worker

Arguments against raising minimum wage

• raising minimum wage causes firms to reduce their demand for labour (to cut costs)

• employers MAY replace workers with machines

• rising wages = rising CoP = rising prices

• Businesses that can’t afford it will go out of business

arguments for raising the minimum wage (1)

• there is no definite link between minimum wage and unemployment

• some things can’t be done by machines

• rising wages motivates people to work more/harder which offsets rising CoP

Other arguments for raising the minimum wage

• rising wages can convince some people to join the workforce

• rising wages leads to rising consumption so AD and employment rise

• allows people to escape the poverty trap

• reduces inequality

How has globalisation and tech progression caused poverty

• it has caused the D for manufacturing workers in developed nations to fall

• wages for them have fallen and they’re technologically unemployed

• D_L for high skilled workers has risen as have their wages

• income inequality has risen and the middle class is ‘hollowed out’

How have market based SSP caused poverty

• Reaganomics and Thatcherism de-regulated the financial sector allowing for the rich to earn more on their investment

• Union power was limited so wages have fallen without much protesting (they can’t)

• the reforms also allowed for more ‘non-standard’ work (not full time)

How have tax and benefits policies caused Poverty

• the top band of tax systems are falling

• corporate profits, dividends, savings and capital gains are taxed at a lower rate than income

• austerity

How has unequal status and power caused poverty

• rich, powerful people have a disproportionate say in politics

• campaigners are financed by the rich so gear their policies towards appealing to their donors

• poorer people are less likely to ever be politicians and are underrepresented in politics.

How has inequality of opportunity caused poverty

• the opportunities that people face are simply unequal from where we’re born to who we’re born to and so on.

how has discrimination caused poverty

• for any reason (gender, age, race)

• prevalent in the opportunities we receive and the outcomes of them. Poorer kids are discriminated against as they don’t have the same educational opportunities so don’t land the highest paying jobs

  • wage discrimination - same job but different wages for reasons unrelated to performance or skills

How has differences in human capital caused Poverty

• in the last decade, skilled worker wages have risen too fast in comparison to unskilled thereby increasing inequality

How has the unequal ownership of resources caused poverty

• owning physical capital - profit

• owning financial capital (shares) - dividends

• the higher your income, the more likely you are to own those things and their value rises a lot faster than wages

Poverty is measured…

,,, in each country by a national poverty line which is a % of median income (usually 50-60)

Poverty Indices

• Human Suffering Index - Ranks the levels of suffering experienced by poor people of calorie intake, supply of clean water and more

• Multi dimensional poverty index - uses 10 indicators to show deprivation in education, health and living standards

  • a person is multi-dimensionally poor if they’re depraved in 1/3 of the indicators

challenges in measuring poverty

• difficult to define (Absolute, Relative, Multi-dimensional) so hard to measure

• some elements are impossible to measure like the anxiety of not knowing when the next meal is

• a Govt can edit the poverty line and the definition to make it look like poverty has lessened

• The results are often from household surveys. results may be worse in a country with less resource

The Lorenz Curve…

…can be used to:

• compare income distribution in 2 or more countries

• compare income distribution in a country over time

How to calculate a Gini index value from a Lorenz curve

• Area A / (Area A + Area B)

Consequences of Poverty and Inequality for Economic Growth

• it can be a motivator for the poorest to improve skills and gain an education to ascend the classes

• A more equal society has no drive and no pools of money needed to invest

• higher levels of poverty and inequality means fewer opportunities for poor people which traps them in a vicious cycle. Kids finish school with a basic education so productivity and EG fall

Consequences of Poverty and Inequality for living standards & social stability

• wide income disparity means anyone below the average is poor

• poor people have to decide what to/what not to buy

• in unequal societies, neighbourhoods and regions may be known rich/poor and may be self perpetuating

• concentrated council housing leads to an area with poorer infrastructure and education

• poorer areas have high hostility which leads to rising tension and crime

Policies to redistribute income/wealth & lower poverty

• Broader access to education in marginalised communities

• improve provision of housing, electricity etc

• improve access to essential healthcare services

• introduce/increase state pension

• taxes (Inheritance, progressive)

• minimum wages

• means tested benefits

What is the Marginal rate of tax

the % of tax paid on the NEXT pound you earn

What is the average rate of tax

the total tax a person paid / their income x 100

what is a regressive tax

A regressive tax is a tax that takes a larger percentage of income from low-income earners than from high-income earners