GCE
Yr13
2014
Poverty
GCE UNIT 3 - POVERTY
JULIA PETERS
ST CHRISTOPHER'S SCHOOL | [Company address]
Table of Contents
Living standards ................................................................................................................................................................ 2
The meaning of Poverty ................................................................................................................................................... 3
The causes of poverty ...................................................................................................................................................... 3
Unemployment............................................................................................................................................................. 3
Changing patterns of demand for labour .................................................................................................................... 3
Lack of education and training/qualifications............................................................................................................. 3
Higher wages for skilled workers ................................................................................................................................. 3
Single Parenthood ........................................................................................................................................................ 3
Longer life spans ........................................................................................................................................................... 4
Poor health ................................................................................................................................................................... 4
Debt .............................................................................................................................................................................. 4
Lack of information on entitlements ........................................................................................................................... 5
Government Policy ....................................................................................................................................................... 5
Specific types of poverty .................................................................................................................................................. 5
Child Poverty ................................................................................................................................................................ 5
Pensioner Poverty ........................................................................................................................................................ 6
Fuel Poverty .................................................................................................................................................................. 7
Incentives and the poverty trap .................................................................................................................................... 10
What are the main policies to tackle poverty and how well will they work? .............................................................. 10
Means-Tested Benefits .............................................................................................................................................. 10
Universal Benefits ...................................................................................................................................................... 11
Progressive Taxation .................................................................................................................................................. 12
Getting people to work – reducing unemployment...................................................................................................... 12
Youth Unemployment ................................................................................................................................................ 12
General Unemployment............................................................................................................................................. 13
The minimum wage ........................................................................................................................................................ 14
Essay Plans ...................................................................................................................................................................... 15
Living standards
Economists want to be able to make statements that compare the standard of living between different
countries or between different time periods. There are a few ways in which we can measure the standard
of living in the UK. Firstly we can look at GDP per capita – this means we take the total GDP and divide it by
the amount of people in the country. We need to do this because comparing GDP does not give us a good
comparison. For example we could compare the UK with the US and think that the UK does not earn much
and maybe the living standards in the UK are not good. However when we divide it by the number of
people we get a much better idea of the average standard of living.
US GDP
$16.24
trillion
US GDP per
capita
$51,749 per
person
UK GDP
$2.472
trillion
UK GDP
per capita
$39,093
per person
We need to remember that this is just an average and does not take into consideration income inequality as
you can see in this graphic.
Another way of measuring standards of living is to look at a
measure called HDI. The HDI is the Human Development
Index. It includes income but it also includes life
expectancy and education to give a more rounded view on
standard of living. In 2011 the UK was positioned 28th on
the HDI rank. This was worse than 2010 when it came 26th.
The US in comparison was 4th in both years.
The meaning of Poverty
To be in poverty means to be poor. There are two ways in which it is possible to be poor. One is to be poor
in absolute terms and the other is to be poor relative to others in society.
Economists use the term absolute poverty to describe the situation of those with income levels so low as to
threaten their continued survival. They are likely to be so poor as not to have all their basic human needs
met. These include food, clothing, warmth and shelter. Some absolute poverty exists in the UK, although
nothing like the scale that is found in many developing countries.
Relative poverty affects those who are poor relative to others in society. Those in relative poverty might or
might not also be in absolute poverty. When there is a big difference between the rich and the poor (the
distribution of income is unequal) there will be more relative poverty. In the UK relative poverty is defined
as a household income of less than 60% of median household income
A term associated with poverty is social exclusion. This means that poverty denies opportunities which leads
to a variety of problems including poor educational attainment, health problems, high crime rates and so on.
The causes of poverty
Specific causes of poverty include:
Unemployment
The benefits that an unemployed person receives will probably be enough to keep them out of absolute
poverty but not relative poverty. The consequences are particularly severe where no member of a
household is in paid work and when unemployment is long term.
Changing patterns of demand for labour
The UK manufacturing industry has been in decline since the 1980s. This has been to the disadvantage of
many who previously earned a good living in heavy industry like ship building and mining and
manufacturing. This means there has been a decline in the demand for skills in these areas. If these people
were unable to retrain they would have been unemployed for a long term or perhaps taken other low paid
jobs.
Lack of education and training/qualifications
Those people that have qualifications gained through education and training are more likely to be employed
than those that do not. Workers with few or no qualifications are unlikely to secure anything but low paid
unemployment.
Higher wages for skilled workers
Employers often experience skills shortages and therefore it is difficult for them to fill vacancies. If this
happens, skilled workers will be able to demand higher wages. This means that the wages of the skilled
workers have increased significantly relative to those of the unskilled which makes the distribution of
income more unequal and increases relative poverty.
Single Parenthood
The proportion of parents who are single in the UK is increasing. The frequency of relative poverty amongst
single parent families is high. This is largely to do with the fact that the family only has one source of
income. If relative poverty is measured by the whole household income there is likely to be more relative
poverty in single parent families. Single parents may also be unable to work if they don’t have affordable
child care. I they do work, payments for child care may take up a large proportion of their wages leaving
little disposable income.
Longer life spans
Life expectancy in the UK is increasing due to improved diet and healthcare. Any pension funds that a
person has will need to be spread over many more years. If a person saved enough for 10 years but lived for
20 years they would have half the expected annual income. Lack of income during retirement can cause
poverty.
Poor health
Poverty is both a cause and a consequence of poor health. Poverty increases the chances of poor health.
Poor health in turn traps people in poverty. Both physical and mental illness makes it particularly difficult to
earn a decent income and can therefore lead to poverty
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When unwell, it is more difficult to study and to achieve qualifications.
It is more difficult to get a job - mental illness carries a heavy social stigma. Surveys have shown a
widespread reluctance amongst employers to take on employees with a disability at any level, and
that applies especially to those with a mental disability.
Of people actively seeking employment, the rate of unemployment is much lower amongst those
without any medical problems than it is amongst those with physical disability. Those with mental
disability face even greater difficulty.
It is more difficult to hold down a job - a person with mental illness may need intermittent and
unpredictable time off when the illness needs more intense treatment. Employers may perceive this,
whether due to mental or physical ill health, as 'unreliability'. They may also have concerns that
there could be risk involved in the individual working whilst unwell.
Even once employed, individuals may feel unsupported both by employers and colleagues. They may
suffer disparaging remarks at work. There is often a lack of sympathy and understanding,
symptomatic of society's general unease with mental illness.
Substance abuse can lead to both physical and mental illness which in turn leads to poverty
Debt
People are often in poverty on a temporary basis and will need to borrow money.
People in poverty in 2000 tended to have debts relative to their incomes 20 to 25 per cent higher
than those of the population as a whole.
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Payday lenders are companies that lend money at very high interest rates. Wonga, one of the
biggest payday lenders, charges an annual interest rate of 5,853 per cent, which its critics have said tips
households into a deepening spiral of debt. Borrowers are turning to payday lenders to pay for
essentials like food, energy and housing costs, and are being granted loans even when they are not in a
position to pay them back, according to research by a debt charity.
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A key issue in helping remove the effects of poverty is increasing access to credit on reasonable
terms. Market rates at which high-income people can borrow are well below those offered by the credit
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unions which the government sees as a means of providing affordable credit to people on low incomes.
At the moment the government has something called the Social Fund which they could expand to give
people in poverty access to affordable credit.
Lack of information on entitlements
Being unaware of benefit entitlements is a common but unavoidable cause of financial hardship. In the UK
£19 billion goes unclaimed every year. The government helps by providing information online. There are
also charities that can help such as The Debt Advice Foundation.
Government Policy
The way that government manages the welfare/benefits system can push people into poverty. For example,
at the moment they are reducing benefits in order to encourage people back to work, removing benefits if
people do not actively look for work, assessing people to see if they have genuine illnesses that prevent
working and generally reducing the money the government spends on the welfare state. There will still be
people, however, that will not go out to work for example, even though the state says that someone is
suitable for work does not mean that they will get work. The reduction in benefits may mean that people’s
incomes are reduced sufficiently to classify them as in poverty.
Specific types of poverty
Child Poverty

Children have replaced pensioners as the most 'at-risk' group
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There are 3.5 million children living in poverty in the UK today. That’s 27 per cent of children, or
more than one in four.
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Work does not provide a guaranteed route out of poverty in the UK. Two-thirds (66 per cent) of
children growing up in poverty live in a family where at least one member works.
 Child poverty blights childhoods.
Growing up in poverty means being cold
because you have very few warm clothes,
going hungry, being unable to join in
activities with friends like birthday parties or
trips at school. For example, 61 per cent of
families in the bottom income twenty
percent would like, but cannot afford, to
take their children on holiday for one week
a year. Many will never go on holiday.
 Child poverty has long-lasting effects. By
16, children receiving free school meals achieve 1.7 grades lower at GCSE than their wealthier peers.
Children who grow up poor are more likely to leave school without qualifications, have lower
employment chances, thus restricting their ability to get a good job and financially contribute to
society
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Poverty is also related to more complicated health histories over the course of a lifetime, again
influencing earnings as well as the overall quality – and indeed length - of life. Professionals live, on
average, eight years longer than unskilled workers.
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Child poverty imposes costs on broader society – estimated to be at least £29 billion a year.
Governments do not receive tax revenue and commit themselves to providing services in the future
if they fail to address child poverty in the here and now.
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Child poverty reduced dramatically between 1998/9-2011/12 when 1.1 million children were lifted
out of poverty (BHC). This reduction is credited in large part to measures that increased the levels
of lone parents working, as well as real and often significant increases in the level of benefits paid to
families with children.
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Under current government policies, child poverty is projected to rise from 2012/13 with an expected
600,000 more children living in poverty by 2015/16. This upward trend is expected to continue with
4.7 million children projected to be living in poverty by 2020.
Pensioner Poverty
The harsh reality of low income in later life
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1 in 6 pensioners (1.8 million or 16% of pensioners in the UK) live in poverty, defined as 60% of
median income after housing costs
Pensioners are also the biggest group of people on the brink of poverty with 1.2 million on the edge
Low income in retirement is often linked to earlier low pay, or time out of employment - for
example, due to caring responsibilities, disability or unemployment
Women, those age 80 to 84, single people living alone, private tenants, and Pakistani and
Bangladeshi people are at greater risk of pensioner poverty
The numbers of people living on low income fell between 1997/98 and 2004/5; since then there has
been little improvement
Current government policy to tackle low income in later life

The Government has introduced the 'triple lock guarantee' so that basic state pension is uprated
by whichever is higher - earnings, prices, or 2.5%
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Benefits such as Pension Credit are available for those older people on a low income who make a
claim for their entitlements
Key areas of support have been protected, including free eye tests, free prescriptions, bus passes
and TV licenses for the over-75s
Winter fuel payments are available for all pensioners
Cold weather payments have been permanently increased to £25 a week
Older people's incomes are stretched to the limit
Many pensioners cope because of their extreme resourcefulness and determination not to get into debt –
something they are proud of. They prioritise paying their household bills, shop around for good deals when
they can, and go without things that many people would take for granted, such as replacing broken
household goods or holidays.
But with their income being stretched by rising costs, many pensioners fear running out of options for
juggling their budgets:
Many are anxious about the cost of care they need now or may need in the near future
The rising prices for fuel and food are also a huge source of anxiety
Benefits such as Pension Credit can make an important difference, but many people do not claim because
they are not aware they are entitled, are put off by the process or are reluctant to ask for help
A Winter Fuel Payment which makes a significant contribution to their bills is essential to protect their
health and well-being, just as the continuation of the free bus travel and bus services to use it on helps some
to shop around or visit family and friends
If older people's already overstretched incomes take any further hits, thousands more will be plunged into
poverty.
Fuel Poverty
Under the new definition, a
household is said to be in fuel poverty
if:

they have required fuel costs that
are above average (the national
median level)
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were they to spend that amount
they would be left with a residual
income below the official poverty line
Statistics are also available for the 10
per cent definition. Under this, a
household is said to be fuel poor if it
needs to spend more than 10% of its
income on fuel to maintain a satisfactory heating regime (usually 21 degrees for the main living area, and 18
degrees for other occupied rooms).
The key causes of fuel poverty are:
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The energy efficiency of the property (and therefore, the energy required to heat and power the
home)
The cost of energy
Household income
Poor standards of energy efficiency mean that many low-income households face high costs to maintain a
warm home and, as a result, many of these households do not heat their home to an adequate level. Many
households experience pressure in paying their energy bills and these pressures tend to be worst for
households on lower incomes. However, amongst the group of low-income households, the causes of this
pressure vary.
 For households that live in a property that is difficult to heat – and who will have difficulties
improving their property – the primary cause is having higher than typical energy costs.
 For others, who may live in more efficient dwellings with lower energy costs, the primary cause of
this pressure is having a low income. We know that under-heating of a property can contribute to
poor health or death. Winter Deaths claimed an estimated 24,000 lives in England and Wales in
2011/12 and many of these were caused by cold homes
 It is estimated that in 2014 there are 2.23 million children England living in fuel poverty. The impact
on children’s health is clear:
o They are more than twice as likely to suffer from a variety of respiratory problems, such as
asthma and bronchitis, as children living in warm homes.
o More than one in four adolescents living in cold housing are at risk of multiple mental health
problems (the figure is one in 20 for those who have always lived in warm housing).
o Cold housing also negatively affects how children perform at school and their emotional wellbeing.
o In the face of great financial hardship, many families are having to cut back on other
essentials to pay their fuel bills or make choices between keeping the house warm and
buying food. A survey by Save the Children found almost half of the parents from the lowest
income families have said they are considering cutting back on food in order to pay their
energy bills.
A short term solution is to help those in fuel poverty in terms of subsidizing their energy bills however, the
only permanent solution is to make all UK homes much more energy efficient – making them so easy and
cheap to heat they effectively become fuel poverty proof. But to make this happen the Government must
give much more financial support to energy efficiency programmes.
Food poverty
Recent estimates have shown that over 500,000 people are now reliant on food aid – the use of food banks
and receipt of food parcels – and this number is likely to escalate further over the coming months. This is
substantially higher than the previous headline figure of 350,000.
Some of the increase in the
number of people using food
banks is caused by
unemployment, increasing levels
of underemployment, low and
falling income, and rising food
and fuel prices. The Trust
believes that National Minimum
Wage and benefits levels need to
rise in line with inflation, in order
to ensure that families retain the
ability to live with dignity and can
afford to feed and clothe
themselves and stay warm.
More alarmingly, up to half of all people
turning to food banks are doing so as a
direct result of having benefit payments
delayed, reduced, or withdrawn altogether.
Changes to the benefit system are the most
common reasons for people using food
banks; these include changes to crisis loan
eligibility rules, delays in payments,
Jobseeker’s Allowance sanctions and
sickness benefit reassessments.
Incentives and the poverty trap
The main policy for reducing poverty is the redistribution of income. This involves taking more income tax
from the high earners and using it to provide benefits. These benefits can be given in two ways:
Means-tested Benefits – given to only those that have a low enough income
Universal Benefits – available to everyone
The poverty trap is when people get stuck in poverty because there is no incentive for them to earn extra
income. If they earn more income they may be entitled to fewer benefits. In addition, they may have to
pay more tax. By earning more they may end up with less disposable income and be worse off. There is no
incentive to earn more.
The unemployment trap is when working means the loss of benefits and starting to pay tax which leaves
the person worse off. Even if they earn the same they are having to work for the same standard of living.
There is no incentive to work at all.
The government needs to reward people for work rather than rewarding them for inactivity. It needs to
take this into consideration when deciding how much benefits to pay people; if they pay them too much
there will be no incentive to work.
What are the main policies to tackle poverty and how well will they work?
The main types of policies that can used to tackle poverty are: means-tested benefits, universal benefits,
progressive taxation and minimum wage laws.
Do nothing – leave it to market forces; The trickle-down effect
The trickle-down effect, if it exists, means that there is less need to redistribute income and could be used as an
argument for government to take no action. If high income earners spend their income the demand for goods and
services increases. This leads to an increase in demand for labour (derived demand) which means an increase in jobs
and an increase in income for those low income earners.
Trickle-Down Economics Definition:
Trickle-down economics does exactly what it says -- the benefits of economic policies that help the wealthy trickle
down to everyone else. For the most part, these policies mean tax cuts. Trickle-down economics assumes that the
real drivers of economic growth are those who are successful in society -- business owners, investors, and savers.
The extra cash they get from tax cuts is used to expand companies directly, investing in business, or adding savings
that can be used for business lending.
According to trickle-down economics, the first thing businesses do with extra money is hire workers. These workers
spend their wages, driving demand. The net result is a faster growing economy.
Trickle-Down Economic Theory:
Trickle-down economic theory is based upon supply side economics. This theory states general tax cuts, to
businesses and workers, will translate to increased economic growth. Businesses will invest, as in trickle-down
economics, but workers will also spend the extra cash, further stimulating demand. Trickle-down theory is more
exclusive than supply-side theory, in that it states that specific types of tax cuts -- corporate, capital gains, and
savings -- work better than general tax cuts.
Trickle-Down Economics Is Based on the Laffer Curve:
Proponents of both trickle-down and supply-side economics point to the Laffer Curve (see further on) for their
proof of how well tax reductions can stimulate the economy. Economist Arthur Laffer showed how tax cuts provide
a powerful multiplication effect. Over time, tax cuts drive business growth and additional hiring so much that
eventually the government revenue lost from the cuts is replaced. That's because the expanded, successful
economy provides a larger tax base.
However, Laffer points out that this effect works best when taxes are in the "Prohibitive Range." If taxes are
already low, then tax cuts will do nothing more than reduce government revenue -- without stimulating additional
economic growth.
Trickle-Down Economics and Reaganomics:
During the Reagan Administration it seemed that trickle-down economics worked. Reagan cut taxes significantly -the top tax rate fell from 70% (for those earning $108,000+) to 28% (for anyone with an income of $18,500 or more).
The corporate tax rate was also cut, from 48% to 34%. Reaganomics was successful in ending the 1980
recession. This was amazing, since the recession was marked by both double-digit unemployment and inflation, a
dreadful situation known as stagflation.
Did Trickle-Down Economics Work?
However, it's difficult to say whether trickle-down economics was the only reason for the prosperity. That's
because, while Reagan cut taxes, he also increased government spending -- by 2.5% a year. Reagan nearly tripled
the Federal debt, which went from $997 billion in 1981 to $2.85 trillion in 1989. This spending went primarily to
defense, in support of Reagan's successful efforts to end the Cold War and bring down the Soviet Union. Therefore,
trickle-down economics was never really tested, since government spending is also a spur to economic growth.
Trickle-Down Hasn't Actually Trickled Down:
If trickle-down economics worked, then lower tax rates during the Reagan Revolution should have increased the
lowest income levels. In fact, the exact opposite has occurred. Income inequality Income has worsened. Between
1979 and 2005, after-tax household income rose 6% for the bottom fifth of income earners. That sounds great, until
you see what happened for the top fifth -- an 80% increase in income. The top 1% saw their income triple. Instead
trickling down, it appears that prosperity trickled up!
Means-Tested Benefits
There is an ageing population in the UK which means that there will be fewer people working and paying
taxes and more people retiring. This means that the government’s revenue will reduce and so their
finances will become increasingly stretched. This in turn means that they will need to target their spending
very carefully. Means-tested benefits are only given to those that most need them so they are well
targeted. This is the main advantage to this kind of benefit. The tax revenue is taken from the high income
earners and redistributed only to those in relative poverty.
The main disadvantages to means-tested benefits are that
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They contribute to poverty and unemployment traps. They take away the incentive to earn more
income or get a job.
o It might be possible to gradually reduce means-tested benefits as extra income is earned
o If the benefit is linked to working this may also improve the incentive. For example the
Working Tax Credit (WTC) which reduces the amount of tax that is paid. As more is earned
less WTC is given.
The take up rate may be low – people may not understand what is available to them, the
application forms may be very complicated and the social stigma attached to claiming benefits
It is an expensive system to run – you need to have people who assess claimants to decide whether
they should have benefits; you need people to check the claimants when circumstances have
changed; the systems that automatically pay people varying amounts have to be very complex
Universal Benefits
Universal benefits are available to everyone regardless of their income; they are not lost when income
increases. Therefore they do not contribute to poverty or unemployment traps. The drawback is that they
are expensive to government and because they are available to everyone they are likely to be small. The
measure is not well targeted and therefore doesn’t really help reduce relative poverty because the multimillionaire will have them as well as the poor.
Progressive Taxation
Progressive taxation is when more tax is taken as a proportion of income from the high income earner than
the low income earner. This tax revenue is then redistributed in the form of benefits.
Advantage – income inequality may reduce
Disadvantages
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For top earners there may be less incentive to work if they are paying too much tax; entrepreneurs
may decide to work in a country where the tax is less causing brain drain and a reduction in the
productive potential of the country (reduction in supply side); a high income earner will pay more
tax than a low
The Laffer curve shows that if the top tax rate is too high the total revenue that is collected by the
government may reduce. This is because the top earners will find ways to legally avoid paying the
taxes or leave the country
The argument for and against progressive taxation is further developed in the essay plans further on in this
document.
Getting people to work – reducing unemployment
Youth Unemployment
It may be that people who grow up in poverty do not have access to the same opportunities as others.
They may have grown up in a family that does not value education. They may have gone to school in a
deprived area where students did not have the right attitude to education. There is an organization called
OFSTED that tries to ensure that schools are a good standard however, by the time young people take their
GCSEs, the gap between rich and poor is very large. For example, only 21 per cent of the poorest fifth
managed to gain five good GCSEs (grades A*-C, including English and Maths), compared with 75 per cent of
the top quintile.
There are many factors that contribute to poor students not doing well:
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They don’t have the belief that they will go on to higher education;
They don’t have the material resources towards education including private tuition, computer and
internet access;
They don’t spend time sharing family meals and outings
The parents quarrel with their child relatively frequently.
The children engage in risky behaviour such as frequent smoking, cannabis use, anti-social
behaviour, truancy, suspension and exclusion
They don’t feel school is worthwhile
They may experience bullying
These issues are extremely complex to fix and mostly involve very long term education through media as
well as at school.
General Unemployment
There are two main reasons for unemployment. The first is lacking the skills to move to another job once a
person has been made unemployed. This is called occupational immobility. The government can help this
type of unemployment by helping people to have general skills such as literacy, numeracy and IT skills.
They can also offer adult training. The second type is geographical immobility where there are jobs
available but not in the area of the unemployed. The person may not want to move either because they
have grown up in that area or they cannot afford to move to the area that is offering employment.
Government can ensure that there is affordable housing in all areas so that people are able to move if they
wish.
In general, if people are aware of jobs available this will help unemployment. Advertising jobs at the Job
Centre helps to keep people informed.
The other main area is to make sure that it is financially worth working. This means setting the minimum
wage, income tax and benefits at the correct levels so that people are better off working.
We need to remember that, when we are discussing
the solutions to poverty that it is not always lack of
employment that is causing the poverty. Last year
(2013) it was reported that more working households
were living in poverty than non-working ones.
This may be a good reason to increase the minimum
wage.
The minimum wage
The national minimum wage (NMW) is a pay floor – it is the lowest amount that a person can be paid per
hour.
We use this diagram to illustrate
Advantages
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The main reason is to raise the wages of those on low pay which should reduce the gap between
the rich and poor (reduces relative poverty – use the Lorenz curve)
To reduce the unemployment trap by providing a greater incentive to work – the NMW raises the
reward for work
As workers escape the unemployment trap they pay more tax and the government has more
revenue
Workers may become more motivated to work and become more productive – this increases the
demand for labour
Labour turnover (people that leave) should fall – this reduces the costs of firms (e.g. training and
recruitment) and encourages firms to take on more people (increase in the demand for labour)
Higher wages leads to more spending which leads to more GDP and economic growth
Disadvantage
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NMW may lead to loss of jobs (E3,E1) – the higher wage means that more people are willing to
supply themselves to the labour market (E2 increases to E1) but firms are less willing to employ
them because their costs will rise (E2 to E3). To date there is no evidence of this in the UK although
this may be because the minimum wage has not been set high enough.
The NMW is not well targeted so does little to alleviate poverty. Many workers on low pay are
second wage earners in their family.
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Firms whose costs increase will pass on these costs to consumers in the form of higher prices
leading to inflation. If there is inflation prices may be high relative to other countries and the UK
exports may become less competitive.
Effect on relative poverty: Is the minimum wage the most effective policy to reduce relative poverty?
There is evidence that it tends to boost the incomes of middle-income households where more than one
household member is already in work whereas the greatest risk of relative poverty is among the
unemployed, elderly and single parent families where the parent is not employed.
Basic Essay Plans
Remember that these plans are very basic. At A2 the essays require a lot of evaluation.
Is the best policy to help fix poverty to use progressive taxation (redistribution of income)
Introduction
Taking money in the form of taxation and giving it to the poor is called redistribution of income. Those
that are on high incomes are taxed more than those on low incomes and this tax is redistributed in the
form of benefits
Advantages
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It should reduce the income gap (draw the Lorenz curve with a closing gap) and therefore reduce
relative poverty; it reduces inequality
o One of government’s objectives is to reduce inequity (unfairness); most governments
believe that everyone is entitled to a certain standard of living. Every government will have
a different view on the level of that standard of living.
Reducing relative poverty should make the workforce healthier
o If people are healthier they will work harder leading to a more productive economy (draw
PPB) which would lead to more economic growth which in turn leads to more income per
person
o The government will need to spend less on the NHS and use those funds to help the
economy grow like improving infrastructure
Reducing relative poverty may reduce crime
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By redistributing the income the poverty cycle may be broken particularly where children are
concerned.
o Children will not grow up in poverty which means they will have a better education, have
more skills, not struggle to find work and escape the poverty cycle.
People on lower incomes tend to save very little; they spend their money. If they are given higher
incomes they will spend and increase GDP. In contrast the rich may save their money which is a
withdrawal from the circular flow of income.
Disadvantages
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If higher income earners are taxed too much they may find ways to avoid tax or they may leave the
country
o This could cause brain drain and a reduction of entrepreneurial spirit which will lead to less
economic growth in the future
High levels of tax may remove the incentive to work harder (laffer curve)
Giving benefit may remove the incentive for those in poverty to find work (unemployment trap)
o If children grow up with parents who are unemployed they may not value being employed
leading to future high levels of unemployment and people reliant on benefits
Trickle-down effect – When the rich earn high levels of income they spend on goods and services.
The firms that make these goods and services need to employ more people. These people (typically
low income earners) will earn more, spend more and increase economic growth. If income is taken
from the rich the trickle-down effect will be less.
An increase in income for low earners may lead to an increased consumption of demerit goods.
Final Judgement
Whether this is the best policy to fix poverty depends on what type of poverty we are talking about. To fix
relative poverty it works because it reduces the large income gap that exists in the UK at the moment (90%
of the population earn less than 13,000 pounds). However, it really depends how much the government
taxes the high earners; if they tax too much it could lead to brain drain. In addition, it depends how much
is given to the poor in benefits; if the level of benefits is too high it will reduce the incentive to work or
increase working hours. Although it might not be the best policy I believe that government has to do it
because it is ethical to do so. However, this policy needs to be alongside other policies such as reducing
the level of tax that the low income worker pays to encourage them to work more and at the same time it
might be better to increase the minimum wage.
Increasing Benefits or Raising NMW? Which is the best solution?
Benefits are payments made by the government to those in need. The government takes income tax from
high earners to make these payments. This is known as redistribution of income (draw and explain Lorenz
curve). The National Minimum Wage (NMW) is the lowest wage that any company can pay to a worker.
Both of these are good solutions to help relative poverty, which is when a person earns less income than
60% of the median. They both give people more income reducing the income gap that is currently huge in
the UK (90% of people earn less than 13000). It would also allow them to have a decent standard of living
and avoid health and crime problems.
Benefits have their problems because they can remove the incentive to work; why would someone work if
they don’t earn much more than when they are on their benefits. In addition, there is less incentive for the
high-income earners to earn more if they have to pay more tax. This could even lead to brain drain or
movement of money to countries where tax is not so high. The trickle-down effect says that those on high
income spend money that creates jobs for the poor therefore high benefits might not be needed.
The NMW might be better because the majority of people that are poor in the UK are already working
therefore this will increase their income and give them more of an incentive to work longer hours. It really
depends on the difference between benefits and the NMW – the NMW needs to be significantly more
particularly for single parent mothers who have to pay for childcare. The big problem with the NMW is
that it causes cost increases for businesses, which means they could put their prices up to continue making
profit causing inflation or even lay off workers causing unemployment.
Overall, I think that benefits should stay as they are because the government in the UK is in too much debt.
They should get businesses to help people out of poverty by increasing the NMW. I don’t think it will cause
too much unemployment or inflation as it has not done so already. It is the best idea because it gives an
incentive to work and gets people to help themselves out of poverty rather than rely on the welfare state.