Absolute & Relative Poverty
Economics: Edexcel A A Level, topic 8.1.1
Poverty
The income needed for a basic standard of living is measured by the poverty line. Poverty is the measure of the number of people who fall below this poverty line.
Relative poverty
- Relative poverty happens when your income is low relative to the rest of society.
- It's often measured as less than 60% of the median income of a country.
Absolute poverty
- Absolute poverty happens when someone can't afford the basic human needs (like food, water and shelter).
Causes of poverty
- Low income.
- Low wealth.
- Being unemployed and not having useful skills to become employed.
- The hysteresis effect is when previous unemployment affects future employment. For example, when someone is unemployed for a long time following a recession and loses their skills, they become less employable and may be less motivated.
- Wages rising more quickly than state benefits (the incomes of those who depend on benefits will decrease over time).
The poverty trap
- This happens when there is no net gain from working.
- E.g imagine a system where whatever the poor earn in income, they lose in government assistance.
- For every £100 they earn, they lose £100 in government support.
- The net gain to work here is zero, and so there is a poverty trap.
The Effects of Poverty
Poverty has a negative impact on society. But not all the effects are bad for the economy.
Benefits of poverty
- Poverty can encourage people to work so that they can improve their income and escape poverty.
- This can reduce absolute poverty long term. Higher inequality will mean that those at the top do well financially.
- This effect will trickle down through higher levels of employment to the poorest in society. They will be more able to rise out of poverty.
- But relative poverty will rise. The rich gain more proportionately than those receiving the trickle-down effect. So, relative poverty will rise.
Negatives of poverty
- Poverty will increase the level of crime.
- Some people may have the entrepreneurial talent and drive to start a company that could benefit society, but lack the resources.
- This is a waste of resources (labour is an input for many businesses and factor of production) and is bad for society.
Test yourself on Absolute & Relative Poverty
Which of these describes a poverty trap?
Johnny is a low-earning graduate in poverty. He gets promoted, but his student loan increases and he is taxed more. What situation is he in?
What is a commonly used threshold for the poverty line in the UK?
What do people in absolute poverty not have access to?
If corporation taxes were lowered for the top 100 companies in the UK, what would likely happen to the proportion of the population in relative poverty?