4.2.1 Absolute and relative poverty Flashcards
What are the two types of poverty?
- Absolute poverty
- Relative poverty
Relative poverty
When someone has a low income relative to other incomes in their country.
So someone from a rich country might be classed as living in relative poverty, even though someone in a much poorer country with the same income might be considered wealthy.
Absolute poverty
When an individual cannot afford the very basis – e.g. food, shelter and water.
The minimum income needed for these basics is called the poverty line (e.g. the World Bank uses a poverty line income of $1.90 per day).
Most significant causes of poverty
- Unemployment – even in a country where the state gives unemployment benefits, unemployed people are likely to be at the bottom level of income in that country.
- Low wages – workers most likely to receive low wages are those with few skills or qualifications.
- State benefits rising more slowly than wages – this means the relative incomes of people relying on state benefits fall over time.
The Poverty Trap
The poverty trap is where people relying on state benefits start to earn higher wages. When this happens, they may only actually recieve a small percentage of their wage increase. This is because they’ll need to pay income tax and NI contributions, and have their benefits reduced (because they are earning more money).
So a combination of income tax, National Insurance and the benefit system can mean it is financially disadvantageous for some people to find work, or to increase the number of hours they work. Governments may attempt to remove these disincentives
What polices can governments use to redistribute income and wealth after it has been earned.
- Benefits
- State provision
- Progressive taxation
How can benefits help to alleviate poverty and redistribute wealth?
Benefits are used to redistribute income - tax revenue (mostly from those with higher incomes) is used to pay for the benefits of those who need them.
However, as means-tested state benefits can contribute to the poverty trap, governments might:
- Remove means tested benefits completely. This would encourage more people to work. However, people who cannot work could end up with no income, and relative and absolute poverty would increase.
- Change means-tested benefits to universal benefits. But the cost of these extra benefits mgiht mean that those on low incomes are taxed more.
- Reduce an individual’s means-tested benefits gradually as their income rises, so they’re not worse off.
How can the state provision of services help to alleviate poverty and redistribute wealth?
State-provided services, such as healthcare and education, help to reduce inequalities caused by differences in income - e.g. someone on a low income can recieve the same healthcare as someone on a high income.
State-provided services also redistribute incomes because a lot of the money to pay for them comes from taxing people with higher incomes. But free access is expensive to provide.
How can progressive taxation help to alleviate poverty and redistribute wealth?
Progressive taxation helps to reduce the difference between people’s disposable incomes, reducing relative poverty.
But progressive taxation can contribute to the poverty trap. Also, if high income earners are taxed too much, some may move to a country where they’re taxed less. This will mean a loss of labour and money from the economy.
What can governments try to do to change the amount of income people recieve, thereby reducing poverty?
- Economic growth
- National Minimum Wage (NMW)
How can economic growth help to alleviate poverty and redistribute wealth?
Economic growth means that jobs are created and unemployment will be reduced. It also tends to lead to high wages, meaning the government will gain more tax revenue, which it can use to provide services and state benefits.
However, economic growth can be difficult to achieve. It can also result in larger inequalities in income - for example, economic growth might mainly benefit the rich so that they become even richer. It can also cause problems such as the using up of finite resources, which might mean more poverty and inequality in the future.
How can a national minimum wage help to alleviate poverty and redistribute wealth?
A national minimum wage - it set at a sensible level - will reduce poverty among the lowest paid workers. It will provide an incentive to work, and will help those on low incomes to afford a reasonable standard of living. A NMW can also counteract monopsony power, by forcing them to pay higher wages.
However, the NMW has the pontential to lead to unemployment, and therefore a rise in poverty. However, there is evidence that this has not happened in the UK.
