Poverty

Absolute Poverty

Absolute poverty refers to a situation where an individual or family is considered as poor, irrespective of the context they are in. The attempt to identify an absolute poverty line, below which someone is considered poor has led to definitions of poverty based on whether individuals can satisfy basic universal needs.

The World Bank considers absolute poverty - also referred to as extreme poverty - as those living on less than $1.90 dollars a day (indexed to 2011, at Purchasing Power Parity), and includes those without access to safe drinking water, to food, or sanitation.

By this measure, around 9% of the world’s population in 2020 lived below the extreme poverty line, with the concentration of global poverty in Africa. In addition to the $1.90-per-day international poverty line, the World Bank measures poverty lines of $3.20 and $5.50, reflecting national poverty lines in lower-middle-income and upper-middle-income countries.

According to the World Bank, extreme poverty had been falling steadily for forty years (down from 42% in 1980 to under 10% in 2019) until the COVID-19 pandemic pushed the estimated rate back up to 10%. [1]


Relative poverty

Relative poverty is poverty ‘in context’ – in other words, in relation to the average in a particular group or ‘population’.

Individuals and families are poor in relation to others when their income and resources are worse than what is thought to be adequate in the society in which they live. The poor are often excluded from involvement in economic, social and cultural life, and generations may be trapped into poverty through this perpetual exclusion. [2]

How relative poverty is measured varies from country to country. While not all countries recognise the concept of relative poverty, many developed countries, including the UK, Australia, and across the EU, identify being 'at risk' of suffering from relative poverty when household income falls below 60% of median income.

A major criticism of this approach is in defining the 'cut-off' point for being at risk. For example, the different between household income of 59% and 61% is likely to be very small, but the formed would be defined as being at risk, whereas the latter are not at risk.

Poverty by demographic characteristic

Poverty levels can be identified and compared between different demographic groups, including 'pensioner poverty' and 'child poverty'. Poverty can be measured in terms of gender, ethnic group, and geographical region.

Causes of poverty

Absolute and relative poverty has several possible causes, including:

Unemployment

The unemployed must either live on their savings, rely on benefits, support from family or charities, or a combination of sources. Unemployment is closely associated with poverty in both absolute and relative terms. Unemployment is likely to rise during periods of economic slowdown, and recession, pushing people below the poverty line.

Underemployment

Underemployment refers to a situation where individuals are employed, but not employed at a sufficiently productive level to earn a wage that takes them out of poverty. In other words there is 'excess labour' in the labour market as a result of not being fully employed, rather than as a result of being unemployed. Underemployment is a common cause of poverty in agriculture-based developing economies, where working on the land generates very little marginal productivity, and the value of a worker's contribution to revenue from agricultural output is very low.

Structural change

The decline in the manufacturing sectors of many advanced economies as a consequence of deindustrialised, has meant that many skilled and semi-skilled jobs have disappeared. This has meant that individuals who previously would have been employed in these sectors now have to work in much lower paid sectors. Structural change can also affect developing countries as they industrialise, with workers who formerly worked on the land not have the skills necessary to gain work in the newly emerging sectors.

Lack of ownership of assets

Individuals and households in many developing countries have no assets to speak off, and certainly not the level of ownership in developed countries. Ownership of assets can generate considerable unearned income in the form of rent and interest. Such unearned income is simply not available to a large share of the population in sub-Saharan Africa or Latin America. A lack of property rights is also a contributor to this inability to gain an income beyond subsistence pay.

Homelessness

Individuals who are homeless are less able to actively look for work and may become dependent on welfare or charity. Again, in many developing countries this is largely a consequence of a lack of property rights.

Low wages

Individuals can still be in work but are relatively poor if they meet the definition of relative poverty that exists. In other words, even in developed economies, wages may be insufficient to prevent individuals from dropping below the poverty line. This also relates to workers who may receive reasonable hourly rates of pay, but only work on a part-time basis.

The gig economy

The rise of the gig economy has brought low paid work to many. While the flexibility of working in the gig economy is a benefit to many, earning may not be sufficient to prevent individuals from falling into poverty.

The hidden economy

Similarly, working in the hidden economy may force individuals to live in poverty. These individuals may be illegal migrants who are paid below any legal minimum wage, and who work for cash. They are unlikely to seek welfare benefits as they would have to register in order to do so. 

Type of market

The type of market or industry providing work can affect pay, employment and poverty levels. For example, workers in sectors where monopsony employers dominate may receive relatively low wages below the free market rate. While monopsonistic employers will have to abide by national minimum wage legislation, there is no guarantee that the wages received take individuals out of poverty.  In some developing economies, especially in Africa [3], worker protection is limited, with trade union power restricted.

Policies to reduce poverty

There are two approaches to dealing with poverty. Firstly, understanding its causes and putting in place policies that address these causes, and secondly implementing policies that support the poor through transfer payments. For example, reducing unemployment is attempting to tackle the cause of poverty, while providing income support deals with the symptoms of poverty.

Promoting economic growth

Economic growth and development is seen as central to the reduction of extreme poverty in both developed and developing countries. Economic growth generates wide-ranging benefits in terms of job creation, industrialisation, the emergence of new industries and services, increasing saving and enabling capital accumulation.

However, growth alone cannot reduce poverty levels. Other, more targeted measures may include:

Progressive taxes and welfare benefits

The use of progressive taxation to redistribute tax from the relatively well off to the less well off is widely used in most countries. This means that the poorest pay no direct income tax as a result of a tax free allowance, or receive some form of tax credit.

Welfare benefits may be in cash payments, or in kind (such as housing support, support to buy food, such as the food stamps scheme in the US, and free school meals. Benefits can be targeted for specific situations - such as pensions, and disability benefits - or more general benefits, such as 'universal' benefits, such as the UK's universal credit.

While this does not necessarily provide a solution to poverty it can provide a safety-net to prevent extreme poverty.

However, the use of benefits can be criticised in that it does not get to the root cause of poverty. While it may prevent extreme poverty and destitution in the short run, critics argue that it can create welfare dependency and trap individuals into long-term poverty by creating moral hazard.

A negative income tax (NIT)

A negative income tax is an attempt to integrate the tax and benefits system into a single system.

An agreed minimum income level sets the line above which individuals pay income tax, and below which they receive a 'negative' income tax as a payment to them. For example, with a negative tax rate of 50%, individuals earning less than the minimum income level would receive 50% of the difference. Taking the US dollar as our benchmark currency, if the monthly minimum income is set at $2000, and an individual earns $1500, they would receive 50% of the difference [$250].

Those who favour this approach [originally attributed to US economist, Milton Friedman) point to three possible benefits.

  1. Firstly, incentives still exist in the system, as the state does not make up all the different between the minimum and the actual level.
  2. Secondly, individuals are free to choose how to allocate their top-up - they are given cash rather than 'in-kind' benefits. This would enable markets to operate more effectively to allocate scarce resources.
  3. Thirdly, considerable administration costs could be saved through streamlining the tax-benefits system.

Universal basic income (UBI)

A universal basic income is a direct payment to individuals irrespective of their current level of income. For example, in Finland, a small scale trial was launched in 2017 giving all individuals in the trial 560 euros a month payment, which was roughly equivalent to unemployment benefit in Finland. However, researchers monitoring the scheme argued that other benefits should not be reduced, and that UBI should be seen as a supplement to existing benefits. [6]

Many countries have experimented with trials on UBI, but none have implemented a system which replaces their existing tax and benefits system.

Minimum wage

A minimum wage may help take the employed out of poverty as well as provide an incentive for individuals to look for work.  However, in the developing world, only around 50% of workers are covered by minimum wage legislation. [4]

In many countries the national minimum wage is not indexed to inflation, and hence may not have kept pace with inflation [5]. In the USA, inflation has eroded the real value of the minimum wage and would have to be increased significantly to return it to its 1968 level. Read more


In conclusion, there is a range of possible policies which can reduce poverty. Most systems involve an income-support safety-net together with schemes to tackle poverty at its root cause, with education, training and employment seen as the most effective long-term solutions in both the developed and developing world.


[1] World Bank https://www.worldbank.org/en/news/press-release/2020/10/07/covid-19-to-add-as-many-as-150-million-extreme-poor-by-2021

[2] Based on The European Commission's definition of poverty published in Joint Report on Social Inclusion 2004.

[3] Ethical Trade Report - https://www.ethicaltrade.org/blog/top-10-worst-countries-workers-rights

[4] WOL.iza.com https://wol.iza.org/articles/does-increasing-the-minimum-wage-reduce-poverty-in-developing-countries/long

[5] The ILO - https://www.ilo.org/global/topics/wages/minimum-wages/setting-adjusting/WCMS_439254/lang--en/index.html

[6] OECD Report as link in a CNBC News Report.