Poverty and Inequality

This chapter consider the economics behind poverty and income inequality. Poverty is described as a state of being poor, having an insufficient amount of a ‘good’such as income, whereas inequality relates to a difference in circumstances such as the incomes of the richest in comparison with the poorest. Inequality in itself does not suggest poverty.

In reviewing inequality, the Chapter notes how it can be caused by employment and associated wage factors, with some sectors attracting higher remuneration than others. This is a reflection of the relative contribution of labour to the overall profitability of the business and the balance between the supply and demand for different skills, experience and qualifications.  The subsequent discussion around poverty recognises that this can be a very broad and subjective area to examine. Whilst the World Bank income approach to assessing levels of poverty is outlined, the Chapter makes it clear that such a metric obviously depends on the cost of living in each country and factors such as inflation. 

The concept of relative poverty is explored, noting how economic growth can help to mitigate such disparities. However, if the growth is unequal across society then it could exacerbate income inequality. This concept is then compared to absolute poverty, when incomes are below the level needed to maintain a basic standard of living so that people cannot afford to eat, keep warm or have adequate shelter. This review supports a subsequent examination of how models and interpretations such as the poverty line provide useful illustrations of how poverty levels change over time.

The nature of poverty traps is considered in the Chapter, noting how it can be perpetuated within economic system that requires a significant amount of various forms of capital to earn enough to escape poverty. This sets the context for a subsequent discussion around some of the safety systems that Governments can employ to support those facing poverty such as unemployment benefits, pensions, income support for those with children, social housing provision and disability/sickness payments for those who cannot work.

The importance and relevance of sustainable growth is highlighted, supported by an outline review of the Solow Growth model. The challenges and barriers which can prevent some workers from benefitting from such growth are also recognised such as an inability to access the training and education needed to secure employment in the roles offered. Broader sustainability issues are discussed, noting how external environmental factors can also shape poverty and income inequality as major development in one area of the economy can actually exacerbate problems in other sectors and regions. The impact of factors such as pollution and how they can create the environmental conditions to perpetuate poverty (such as pollution from urban development destroying established agriculture) are emphasised.

The Chapter closes with an outline review of the Coase Theorem and a consideration of the labour market interventions that can be taken forward by Governments to address poverty and income inequality concerns. The impact and importance of migration is also debated.


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