Poverty

Types of Poverty

Absolute Poverty

• Absolute poverty is where people earn below internationally defined levels of income.
• Usually defined as $3 a day or less.
• People in absolute poverty lack access to basic necessities (food, education, shelter, etc.)

Relative Poverty

• The income is lower than the average level of income in that economy.
• People living in relative poverty might be struggling to get by and only be able to afford basic necessities.
• Relative poverty differs from country to country.
  • Due to different currency exchange rates, one might struggle with an income of 10$ in an hour in one country while they could afford much more with the same income in another country.

Causes of Poverty and Economic Inequality

Inequality of Opportunity

• People in the same society don't have access to the same opportunities.
• Positions in society with wealth, power and status are more likely to have greater opportunities.

Resource Ownership

• Wealth inherited in the form of stocks, companies or property gives some greater advantages compared to low-income citizens.
  • In recent years, average profits and the value of share prices has risen at a much higher rate than average wages and salaries.
  • Even when working around the clock it is nearly impossible to earn as much as someone with lots of wealth in shares or real estate.

Different Levels of Human Capital

• State sectors often struggle to ensure a high quality of education leading to low levels of human capital in a society.
• Those able to afford private education are likely to have higher levels of human capital.
  • Greater human capital is valued and these people will likely get a job with a higher income.

Discrimination

• Discrimination through hiring practices and payment for services often leads to certain groups being proportionately disadvantaged.
  • Gender pay gap, hiring demographics

Unequal Status and Power

• Cultural status and power play a large role in inequality.
• Cultural ideas about certain groups being "better" than others determine relationships, jobs, school placements, etc.

• Donation to political parties are done by wealthy individuals.
  • This gives them the ability to influence which political parties are more strongly represented.
• Low income people are less involved in the political process and therefore not adequately represented.

Government Taxation and Benefits

• Certain policies favor individuals with high wealth and income.
• Those that have the majority of money in stocks/bonds pay a lower percentage of capital gains compared to income.

Globalization and Technological Change

• With increasing globalization and changes in technology, certain countries are left behind without desirable training or skills leading to increases in unemployment.

Market-Based Supply-Side Policies

• These policies aim to increase LRAS by increasing competition, labor reform, and increasing incentives.
• However, these policies can also further inequality.
  • For example:
    • Tax/business cuts, reducing unemployment, reducing minimum wage.
  • Real World Examples:
    • 1980's introducing market oriented supply side policies under Thatcher in the UK and Reagan in the USA.
    • These policies were met with lots of criticism as they made life very difficult for those living in or near poverty.
• Standard versus non-standard employment (0 hour contracts).

The Impact of Income and Wealth Inequality

Economic Growth

• Economic growth is lower with poor income inequality.
  • Consumption and productivity are lower than potential.

Standards of Living

• Reductions in income lead to a fall in standards of living and serve as an obstacle to economic development.

Social Stability

• Individuals and countries who do not have adequate levels of health care or education struggle in their respective societies.

The Role of Governments to Reduce Poverty, Income Inequality and Wealth Inequality

Taxation

• Taxation has the ability to aid or further income and wealth inequality.

Indirect Taxes

• Regressive in nature and theoretically increase economic inequality.

Direct Taxes

• Progressive in nature and have the ability to redirect money to areas of need.

Personal Income Tax

• Takes a higher portion of income from high earners and redistributes money to lower earners.
• These taxes are also progressive.

Corporate Tax

• Similar to personal income tax, but for corporations.
• Although corporate tax cuts could theoretically lead to greater employment, research estimated the richest 1% benefit the most from corporate taxes.

• Could cause tax evasion and tax evasion.
• It might lead to a "race to the bottom" where countries lower corporate taxes compared to their neighbors to bring in investors and businesses.
  • This leads to "tax-havens" such as Cyprus that have very low corporate tax, making them hotspots for company headquarters.
  • An internationally-agreed minimum corporate tax could solve this issue.

Wealth Tax

• Wealth taxes are directed at an individual's assets such as real estate, cash, bank deposits, etc.
• The goal of a wealth tax is to reduce the accumulation of wealth and redistribute money to individuals with low wealth.

Indirect Taxation to Reduce Economic Inequality

• High luxury tax on luxury goods.
• Reduced VAT/GST tax on necessity goods such as food, water, medical care, or public transport aims to reduce the proportion of tax paid by poor households.

Government Policies

Inequality of Human Capital

• Can be solved with interventionist supply-side policies.
  • For example re-training programs and providing public education.
  • These policies tend to be very effective but only in the long-run and have high opportunity costs.
• Governments may try to ensure fair access to resources to reduce inequality

Funding for certain schools in low-income areas

• Scholarships, grants, loans or free university.
• Providing some type of universal access to health care.
• Offering training programs and job assistance.

Transfer Payments

• Governments may use transfer payments.
• Direct payments from the government to individuals to redistribute income.
  • Transfer payments can be means-tested or universal.
    • Universal payments are given to everyone.
    • Means-tested payments are given out based on certain criteria.
  • Examples are:
    • Pensions for older individuals
    • Unemployment benefits
    • Child allowances (free meals at schools)
    • Universal basic income (UBI)

Targeted Spending

• Spending on education, health care and infrastructure in low-income communities.

Policies to Reduce Discrimination

• Governments may implement legislation to protect certain groups typically discriminated against such as racial minorities, senior citizens and those who identify as a non-dominant gender.

Minimum Wages

• While minimum wages do result in higher levels of unemployment, it also results in higher standards of living for those employed.
• It also avoids working poverty.
  • Working poverty is when someone is employed and earns income, but is still living in poverty.
  • Such a situation is very difficult as one cannot afford to leave their job to look for another one, and might not have the skills to get a higher-paying job to begin with.

Arguments Against Minimum Wage

• A higher minimum wage will hurt the workers it is designed to help because firms will reduce the quantity of labor, they demand and so it will lead to an increase in unemployment for those unskilled workers working at the minimum wage.
• Employers will replace workers with machines if the price of labor increases.
• Higher wages mean higher costs of production and so higher prices.
• Businesses that cannot afford the higher wages will go out of business, increasing unemployment.

Arguments for Minimum Wage

• There is no obvious empirical relationship between a minimum wage and unemployment.
• Much of the work done by minimum wage workers cannot be done by machines, making them difficult to replace.
• Higher wages motivate people to work harder and so their higher productivity offsets the higher wages.
• Higher wages encourage people to stay in the jobs for longer, and this reduces the costs of hiring and re-training workers.
• Higher wages encourage people to join the labor market, and so reduce unemployment.
• Higher wages result in increased consumption by low-wage workers, leading to an increase in aggregate demand and increased employment.
• The minimum wage is generally what is earned by low-skilled workers in occupations such as retail salespeople, fast-food workers, cleaners and people who care for children or the elderly.
  • These are often the people who were deprived of opportunities to obtain an education that would have given them the skills needed for higher-paid jobs.
  • A higher minimum wage allows them to escape the poverty trap and provide better opportunities for their own children.
• Many of the jobs done by minimum wage workers are done by women.
  • Increasing the minimum wage can narrow the wage gap between men and women.
• Higher minimum wages reduce inequality.