Poverty | IGCSE Class 10 Economics Notes

This note covers the meaning of absolute and relative poverty, the causes of poverty (unemployment, low wages, illness and age), and policies to alleviate poverty and redistribute income (economic growth, education, state benefits, progressive taxation and the national minimum wage).

What is poverty, and how do economists define it?

Poverty means not having enough income or resources to meet basic needs. Economists split the idea into two measures that ask different questions.

Definition: absolute poverty. A situation in which a person's or household's income is too low to afford a fixed minimum standard of basic necessities such as food, clean water, clothing and shelter, measured against a set threshold that does not change with average incomes.

Definition: relative poverty. A situation in which a person's or household's income is low compared with the average (or median) income in their own country, so the threshold rises and falls as the country's living standards change.

The key difference is what the threshold is measured against. An absolute poverty line is fixed in real terms, so a country can reduce absolute poverty over time even if incomes generally rise, because fewer households fall below the fixed minimum.

A relative poverty line moves with average income, so relative poverty can stay the same, or even rise, in a country that is getting richer overall if the gap between the poorest and the average widens.

A country could therefore cut absolute poverty while relative poverty stays unchanged, which is why economists and governments track both measures rather than just one.

How is poverty measured?

Governments and international organisations set a poverty line, a specific level of income below which a household is classed as poor, so that poverty can be counted and compared over time.

Definition: poverty line. A level of income, set by a government or an international body, below which a household or individual is officially classified as living in poverty.

Two common approaches appear in practice. An absolute poverty line is expressed as a fixed amount of money needed to buy a basic basket of necessities, for example an international absolute poverty line used by the World Bank.

A relative poverty line is usually expressed as a percentage of a country's median household income, commonly 50% or 60% of the median, so it automatically adjusts as the whole income distribution shifts.

Worked example 1. In Country A, median monthly household income is $2,000. The relative poverty line is set at 60% of median income. A single-person household earns $900 a month. Is this household in relative poverty?

Answer: Poverty line = 60% × $2,000 = $1,200. The household's income of $900 is below $1,200, so the household is classed as living in relative poverty.

Worked example 2. In Country B, the international absolute poverty line is $3.00 a day. A household of four people has a combined daily income of $7.40. Is each member above or below the absolute poverty line on average?

Answer: Income per person per day = $7.40 ÷ 4 = $1.85. Since $1.85 is below $3.00, each member of the household is, on average, below the absolute poverty line.

What causes poverty?

Poverty usually has more than one cause acting together. The main causes are unemployment, low wages, illness and old age.

Unemployment

Unemployment is a major cause of poverty because a household with no earner has no wage income, and unemployment benefits, where they exist, are usually set below the income the person earned in work.

A household can move quickly from a reasonable income into poverty if its main earner loses a job, especially where jobs lost are permanent, well-paid jobs that are replaced only by less secure, worse-paid work.

For example, when a large factory or a whole industry closes, workers who had secure jobs with sick pay and pensions may find only casual work in the informal sector, and some households fall from a middle income into poverty.

Low wages

Even people in work can be poor if their wages are too low to cover basic needs; this is sometimes called "working poverty".

Workers who are casually employed, paid by the day or task rather than on a regular contract, are especially vulnerable because their income is irregular and often below that of permanent employees doing similar work.

Self-employed people running very small enterprises can also earn low and unstable incomes, since their earnings depend directly on how much work they find rather than on a fixed wage.

Illness

Illness causes poverty in two ways at once. First, a sick person may be unable to work, so household income falls or stops. Second, treating the illness costs money, so household spending rises just when income has fallen.

Where there is no free or low-cost public healthcare and no sick pay, a serious or long illness can push a household that was previously above the poverty line into poverty.

Age

Old age is a common cause of poverty because many elderly people can no longer work, or can only work part-time, and so rely on pensions, savings or family support.

Where pensions are small, or where a person has no savings and no family to support them, income in old age can fall well below the poverty line.

Very young people depend entirely on their household's income, so a household already close to the poverty line is especially vulnerable if it also has children who cannot yet contribute to income.

What policies promote economic growth to reduce poverty?

Economic growth means an increase in a country's total output over time. Growth can reduce poverty because, as the economy produces more, firms generally need more workers, which creates jobs and raises demand for labour; this can raise wages and reduce unemployment, both of which are direct causes of poverty.

Growth also raises government tax revenue, even without raising tax rates, giving the government more money to spend on state benefits, education and health services that help the poor.

Growth alone does not guarantee less poverty. If the extra output and income go mainly to those who are already well-off, inequality can rise even as average income rises, so relative poverty may not fall. This is one reason governments combine growth-promoting policies with policies that redistribute income directly.

How can education reduce poverty?

Education raises a worker's skills and qualifications, which raises their productivity, the value of what they can produce in a given time.

More productive workers can generally command higher wages, so improved education can lift a worker's income over their working life and reduce the chance that low wages keep them in poverty.

Education also widens the range of jobs a person can do, reducing the risk that they are stuck in casual or insecure work because they have no alternative.

Over a generation, better-educated children from poor households have a greater chance of moving into better-paid, more secure jobs than their parents had, which can reduce poverty passed down within families.

Because the benefits of education take years to appear, it is a slower policy than, for example, raising state benefits, so governments usually combine it with more immediate measures.

What role do state benefits and progressive taxation play in redistributing income?

Governments can redistribute income directly from richer to poorer households using two connected tools.

Definition: state benefits. Payments made by a government to individuals or households, for example unemployment benefit, sickness benefit or a pension, usually funded out of general taxation.

Definition: progressive taxation. A tax system in which the percentage of income paid in tax rises as income rises, so that people on higher incomes pay a larger proportion of their income in tax than people on lower incomes.

More generous state benefits raise the income of households that are unemployed, sick, elderly or otherwise without enough earnings, directly reducing the number of households below the poverty line.

Progressive taxation funds this spending by taking a larger share from higher incomes, so that income is redistributed from richer to poorer households through the tax and benefit system together.

The combination is sometimes described as redistributing income "from rich to poor" rather than relying only on growth to raise everyone's income over time.

What is a national minimum wage, and how does it help reduce poverty?

Definition: national minimum wage. A legal floor set by a government below which employers cannot pay their workers, intended to guarantee a minimum level of earnings to those in work.

A national minimum wage aims to reduce "working poverty" directly by raising the pay of the lowest-paid workers, tackling low wages as a cause of poverty without waiting for growth or education to raise pay indirectly.

Because it is set and enforced by law, it applies immediately to covered workers, unlike education, whose benefits take years to show.

1. The government researches typical low pay and the cost of basic living in the country.
2. It sets a legal minimum hourly or monthly wage rate.
3. Employers in covered sectors must pay at least this rate to their workers.
4. The rate is usually reviewed and adjusted periodically, often in line with prices or average earnings.
5. Inspectors or labour authorities monitor compliance and penalise employers who pay below the minimum.

A minimum wage set too high relative to what firms can afford can also reduce the number of jobs firms are willing to offer, which is why its level is debated; this trade-off is considered further below.

What are the advantages and limitations of poverty-alleviation policies?

Advantages

• Economic growth can create jobs and raise tax revenue without the government having to raise tax rates.
• Education raises long-term productivity and widens the range of better-paid jobs available to the poor.
• State benefits give immediate relief to households with no or very low income.
• Progressive taxation funds redistribution while asking more from those most able to pay.
• A national minimum wage raises in-work income immediately, without a time lag.

Limitations

• Growth may raise average income while leaving relative poverty largely unchanged if the gains go mainly to higher earners.
• Education takes years to improve earnings, so it does little for a household in poverty right now.
• Generous state benefits must be funded by higher taxes or borrowing, and can reduce some people's incentive to seek work if benefits are close to in-work income.
• Very high rates of progressive taxation can reduce the incentive for high earners to work extra hours or invest.
• Setting a national minimum wage too high relative to firms' ability to pay may lead some employers to cut jobs or hours.

Going beyond the syllabus

When a large employer or a whole industry closes, the loss of secure work can push whole communities into poverty, not just individual households. Workers who had steady jobs, a living wage and protection for their health and old age may find only casual, informal work, and the effects can spread to the next generation if children leave school early to earn.

This kind of shift from secure, regular work into casual or informal work is sometimes called "casualisation" of the workforce. Workers who move this way often lose benefits such as maternity pay, sick pay and a pension that came with their earlier, more secure jobs, even if their daily cash earnings do not immediately fall.

This illustrates why governments concerned with poverty look not only at whether people are in work, but at the security and quality of the work available to them, since insecure, informal work leaves households more exposed to the causes of poverty described above.

Glossary

• Absolute poverty — income too low to afford a fixed minimum standard of basic necessities
• Relative poverty — income low compared with the average or median income in one's own country
• Poverty line — the level of income below which a person is officially classed as poor
• Unemployment — being without paid work while actively seeking it
• Low wages — pay too low to cover a household's basic needs despite being in work
• Casual wage labour — irregular, day-to-day paid work with no fixed contract
• Informal sector — enterprises and workers not covered by labour law protections or regular contracts
• State benefits — government payments to individuals, such as unemployment or sickness benefit
• Progressive taxation — a tax system where the percentage of income paid in tax rises as income rises
• National minimum wage — the legal lowest wage an employer may pay
• Economic growth — an increase in a country's total output over time
• Redistribution of income — transferring income from richer to poorer households through tax and benefits
• Productivity — the amount a worker can produce in a given time
• Working poverty — being poor despite being in paid employment, because pay is too low

Common errors and misconceptions

• Misconception: Absolute and relative poverty are measured the same way. Correct: Absolute poverty is measured against a fixed minimum standard, while relative poverty is measured against the country's own average or median income, which can change.
• Misconception: Economic growth always reduces poverty. Correct: Growth can reduce poverty, but if the gains go mainly to higher earners, relative poverty can stay the same or rise even as average income grows.
• Misconception: Only unemployed people can be poor. Correct: People in work can also be poor if their wages are too low, a situation called working poverty.
• Misconception: A higher minimum wage can never cause problems. Correct: If set too high relative to what firms can afford, a minimum wage may lead some employers to cut jobs or hours.
• Misconception: Progressive taxation means everyone pays the same tax rate. Correct: Under progressive taxation, the percentage of income paid in tax rises as income rises, so higher earners pay a larger proportion.
• Misconception: Illness and old age only matter to individuals, not to poverty statistics. Correct: Illness and old age are recognised causes of poverty because they reduce a household's ability to earn income.
• Misconception: Education reduces poverty immediately. Correct: Education raises future earning potential, but its effect on income appears only after years of schooling or training.

Exam-style questions with model answers

Q1. State two causes of poverty, other than unemployment. [2 marks]

1. Low wages: a person can be in work but still poor if pay is too low to cover basic needs.
2. Illness: a sick person may lose income by being unable to work, while also facing higher spending on treatment.

Q2. Define 'poverty line'. [2 marks]

1. A poverty line is a level of income, set by a government or an international body, below which a household or individual is officially classified as living in poverty.
2. Two common types are an absolute poverty line, a fixed amount needed for a basic basket of necessities, and a relative poverty line, usually set as a percentage of median income.

Q3. Explain two reasons why illness can push a household into poverty. [4 marks]

1. Illness can stop a person working, so the household loses its main source of earned income during the illness.
2. Treating illness costs money, for example on medicines, doctors' fees or hospital stays, which raises household spending.
3. These two effects, falling income and rising spending, happen at the same time, squeezing the household's budget from both sides.
4. Where there is no free public healthcare and no sick pay, a serious or long illness can push a household that was previously above the poverty line into poverty.

Q4. In Country D, median monthly household income is $2,400. The relative poverty line is set at 50% of median income. A household earns $1,100 a month. Calculate whether the household is in relative poverty, showing your working. [4 marks]

1. Poverty line = 50% × median income = 50% × $2,400 = $1,200.
2. The household's income of $1,100 is compared with this poverty line of $1,200.
3. Since $1,100 is below $1,200, the household's income is below the relative poverty line.
4. The household is therefore classed as living in relative poverty.

Q5. Explain two reasons why a national minimum wage might reduce poverty. [4 marks]

1. A national minimum wage is a legal floor set by government below which employers cannot pay workers.
2. It raises the pay of the lowest-paid workers directly, tackling low wages, which is a cause of poverty.
3. Because it is set and enforced by law, it applies immediately, unlike education, whose benefits take years to appear.
4. By raising earnings in work, it can lift a household above the poverty line without waiting for economic growth to raise pay indirectly.

Q6. Analyse two policies a government could use to redistribute income from richer to poorer households. [6 marks]

1. Progressive taxation takes a larger percentage of income from higher earners than from lower earners, so more tax revenue is collected from the richest households relative to their income.
2. This revenue can then be spent on state benefits, such as unemployment benefit, sickness benefit or pensions, which transfer money directly to households with low or no income.
3. Together, progressive taxation and state benefits move income from richer to poorer households through the tax and spending system, reducing the gap between high and low incomes.
4. A government could also set a national minimum wage, which raises the pay of the lowest-paid workers directly, without needing to raise taxes on anyone, redistributing income within the labour market itself rather than through taxes and benefits.
5. Both approaches can be used together: taxes and benefits redistribute income after it has been earned, while a minimum wage changes how much is earned in the first place.

Q7. Discuss whether a government should rely mainly on economic growth, rather than progressive taxation and state benefits, to reduce poverty. [8 marks]

1. Economic growth increases a country's total output, which generally raises demand for workers, creates jobs and can push up wages, reducing both unemployment and low wages, two direct causes of poverty.
2. Growth also raises government tax revenue without needing higher tax rates, giving the government more money that could be spent on education, health and benefits for poorer households.
3. However, growth does not guarantee that the poorest households benefit: if extra income goes mainly to those already well-off, average income can rise while relative poverty stays the same or even increases.
4. Growth also takes time to reach households already in poverty from illness or old age, who may be unable to work and so cannot benefit directly from new jobs created by growth.
5. Progressive taxation and state benefits act more directly: benefits raise the income of a poor household straight away, and progressive taxation funds this without waiting for the whole economy to grow first.
6. A government relying only on growth risks leaving behind those unable to work, such as the sick and the elderly, while a government relying only on taxation and benefits risks discouraging work and investment among high earners.
7. A reasonable conclusion is that growth and redistribution work best together, since growth raises the total income available while progressive taxation and state benefits make sure some of that income reaches households that growth alone would not quickly help.

Key takeaways

• Absolute poverty is measured against a fixed minimum standard of necessities; relative poverty is measured against the country's own average or median income.
• A country can reduce absolute poverty while relative poverty stays unchanged, because the two thresholds move differently.
• Unemployment causes poverty because a household loses its wage income and benefits are usually lower than previous earnings.
• Low wages cause "working poverty" where pay, though regular, is too low to cover basic needs.
• Illness causes poverty both by stopping work and by adding medical costs at the same time.
• Old age causes poverty where pensions or savings are too small once a person can no longer work.
• Economic growth can reduce poverty through more jobs and higher tax revenue, but gains may not reach the poorest.
• Improved education raises future wages by raising productivity, but the benefit appears only after years of schooling.
• Progressive taxation and more generous state benefits redistribute income from richer to poorer households directly.
• A national minimum wage raises the pay of the lowest-paid workers immediately, but set too high it may reduce jobs offered.

Test yourself

What is the main difference between absolute and relative poverty?

Absolute poverty is measured against a fixed minimum standard of necessities; relative poverty is measured against the country's own changing average or median income.

Why can a person in full-time work still be in poverty?

If their wages are too low to cover basic needs, they experience working poverty even though they are employed.

Give two reasons illness can push a household into poverty.

It can stop the person earning, and it adds extra medical costs, both reducing the money left for basic needs.

Why is old age a common cause of poverty?

Many elderly people cannot work, so they depend on pensions or savings, which may be too small to cover basic needs.

How can economic growth reduce poverty?

Growth can create jobs and raise wages, and it increases tax revenue that governments can spend on education, health and benefits.

Why might growth fail to reduce relative poverty?

If the extra income from growth goes mainly to higher earners, relative poverty can stay the same or rise even as average income increases.

How does a national minimum wage aim to reduce poverty?

It sets a legal floor on pay, raising the income of the lowest-paid workers immediately, tackling low wages as a cause of poverty.

How do progressive taxation and state benefits work together to redistribute income?

Progressive taxation collects a larger share of income from higher earners, funding state benefits that transfer money to lower-income households.