Understanding the Types Poverty

When looking at poverty, we need to understand the different types of poverty that exist, especially in order to be able to look at poverty in different countries. The two types of poverty we have are: 

• Absolute Poverty

• Relative Poverty

Single indicators refer to one factor or measure. For example, GDP per capita. These single indicators are useful in helping a government identify a specific problem or change in specific problem. Some examples of single indicators include: 

• % of households in Absolute Poverty

• Household Income

• GDP per capita 

• % of children in primary education

• Birth and Death Rates

Composite indicators take a wide range of single indicators and combine them to create an index. These measures are used to account for the Multidimensional complexity of poverty and its causes. 

Human Development Index

The UN Human Development Index (HDI) is a composite indicator that aims to give a bigger picture of the overall quality of life. It consists of:

• GNI per capita

• Life Expectancy at Birth

• Years of schooling (Expected & Mean Years)

HDI is ranked on a scale from 0 to 1.0, with 1.0 being the highest human development. HDI is broken down into four tiers: very high human development (0.8-1.0), high human development (0.7-0.79), medium human development (0.55-.70), and low human development (below 0.55). Norway scores highest on the measure at 0.953, where as Niger is lowest at 0.374. (Figures for 2021). 

Difficulties in Measuring Poverty

Despite the use of composite indicators to understand the bigger picture of poverty, there are still a number of difficulties when trying to measure poverty. Below are some of the difficulties:

• Difficulties in setting a global line of poverty - Each country sets its own national line of poverty that is related to the specific economic situation of that country. However, the difficulty is how to present this national measure in the form of an international poverty line for all nations. Due to this, trying to set a standard line of poverty has been difficult.

• Difficulties in measuring relative poverty - Relative poverty is highly subjective and this therefore makes it difficult to set a particular level or measure. 

• Difficulties in measuring the causes of low incomes  and poverty - Understanding the causes of low incomes and therefore the number of people in absolute poverty presents another difficulty in measuring poverty. For example if poverty is caused through a short term recession and increase in cyclical unemployment, the policy response is different to one where the low incomes are caused by low levels of human capital and more structural long term factors. This information is not reflected in the measure of poverty, therefore this presents difficulties in measuring the cause of poverty. 

Income inequalities occur due to the unequal distribution of income within an economy. The income is earned from the ownership of the factors of production, through the factor payments. 

For providing land, a household will receive Rent

For providing labour, a household will receive Salary/Wages

For providing capital, a household will receive Interest

For providing enterprise, a household will receive Profits.

Therefore, if the FOPs are unequally distributed among households, then the income received by those households over the course of a year will also be unequally distributed. Some income inequality is a natural side effect of a capitalist system as the system relies on the private ownership of resources. 

However, the debate that has resurfaced surrounding how much inequality is too much inequality and what is considered "fair". Some may consider this to be so long as those on lower incomes are able to live a good life and are presented with the Economic opportunities to climb the ladder. Others may consider the gap in income earn´t between the higher income earners and lower income earners to be lower (not equal). 

Wealth is different to income. Wealth is the accumulation of assets over time. For example, an individual owns a home, has some savings and owns some shares. These would all contribute to the individuals wealth. Whereas an individual's income is measured in a time period, such as one year, wealth is an accumulation of assets. The issues with wealth inequalities is that the assets individuals own can generate an income. For example, savings in a bank earn interest and so the more savings an individual has, the more the interest on those savings will be. 

Overtime these wealth inequalities can therefore lead to higher income inequalities. For example, ownership of 89% of all stocks in the US are held by just 10% of wealthiest US citizens. As stock portfolios value rise over time, the wealth of the 10% will rise faster than for the 90% due to the large difference in the ownership of the assets. 

In another example, Oxfam suggests 85 of the wealthiest individuals in the world possessed more cumulative wealth than that of the bottom 48 countries (or 3 billion people). 

Inequality of opportunity - If the economic or social opportunities are not available to everyone, this can cause higher levels of income inequality. For example, the mean years of education in Germany is 14.1 years per person. This compares with just 1.5 years in Burkina Faso. That means that the opportunity to improve their human capital and therefore potential income earnings is much higher in Germany, providing inequality of opportunities in Education between people born in Germany and those born in Burkina Faso. This can also be true within countries. For example, in the UK only 6% of students are educated in private schools, however they make up 55% of all students in the Russell Group universities (top universities). A study found that those who attend these Russell Group universities on average earn 40% higher than those who attended other universities. 

Different levels of resource ownership - As we have previously mentioned, unequal ownership of the Factors of Production will lead to an unequal distribution of Income due to the factor payments received.  The less factors of production an individual owns, the lower the factor payments they will receive. Therefore, higher levels of unequal ownership of FOPs and resources, can lead to high levels of income inequality. 

Different levels of human capital - Individuals with higher levels of education and training are able to demand higher wages and salaries. For example, the mean salary for a doctor in the US is $313,000 per year. This compares to $26,698 as the mean salary for a shop worker. Of course, doctors require much higher levels of education and training and therefore require more specialisation compared to a shop worker. However, linking to the first point, if the opportunities for a good education are limited or unequal, this will cause larger Income Inequality in an economy. 

Discrimination (gender, race and others) - Factors such as gender, race or social group may cause discrimination from the ability to access education or the job market. Or simply based on their social profile, they may receive less compared with another member from a different social profile. 

Government tax and benefits policies - Levels of taxation or provision of government benefits can cause income inequality. For example, Brazil has very high levels of indirect taxation (taxation placed on goods and services) at around 49% of all tax burden. These types of taxation are considered to be regressive in nature due to the higher % of income paid by those on lower incomes. As well as this, the average tax rate paid on incomes actually decreases as income rise. As a result of these policies, those on lower incomes will pay more as a proportion of their income, as compared to those on higher incomes. At the same time, lower levels of government spending on schools, infrastructure and other merit goods, have led to lower opportunities for those on low incomes to earn higher incomes. This is one of the reasons for Brazil to be ranked as the 9th unequal economy as of 2022. 

Globalisation and technological change - Over the past few decades, more countries have embraced free trade and globalisation. As a result, more countries have began to specialise in what they can produce at the lowest cost and import goods from other countries that can produce at a lower cost. This theory of trade is that everyone will benefit from lower prices. However, as the economic structures of countries changed, this brought about structural unemployment. For example, 150,000 jobs have been lost in the UK steel industry since 1980 as free trade allowed for cheaper imports from more efficient foreign producers. On top of this, technological advances in the industry meant the production that did happen in the UK was now more capital intensive and required less labour. As such, this creates structural unemployment, whereby individuals do not possess the skills needed for the jobs in the economy, increasing income inequalities. 

Market-based supply-side policies - Market Based policies are those that aim to increase competition and free market efficiency. These could include the reduction in policies that create labour market rigidities, such as minimum wage, the power of trade unions or legal protections like contracts.  Reducing or removing these policies can reduce the incomes of lower income groups, worsening the distribution of income. For example, in order to try and help the economy recover after the 2008/9 recession, the UK government introduced zero hour contracts. These contracts allowed a business to hire someone for just the hours they needed that worker for in that week. For example, a worker may have 10 hours of work 1 week and then 0 the week after. The theory was that these reduced costs for firms, lowering costs of production and therefore increasing employment. However, these contracts generally paid individuals lower than traditional contracts, thus worsening the income inequality.

The debate on the effects of income and wealth inequality on Economic Growth

Social stability 

Higher levels of wealth and/or income inequality may create social unrest, especially if this is due to high levels of corruption. On the other hand, a more equally distribution of wealth/income may provide more social stability and less unrest. 

The Coronavirus Pandemic and Social Unrest.

During the global Coronavirus pandemic that disrupted economic activity globally, those countries with a higher unequal distribution of income experienced higher levels of social unrest. This may be due to the effects of lockdowns on income groups (especially lower income groups) and the lack of government expenditure in order to support these groups, causing 

Click here for more information on the effects of Pandemics, Income inequality and Social Unrest

On the other hand, countries with more social policies, such as transfer payments, may reduce income inequalities, whilst at the same time promote a higher standard of living for those households as these payments may ensure households do not fall below the poverty line. 

Higher progressive taxation can provide governments with additional revenues to be able to spend on transfer payments or on human or physical capital such as education, healthcare or infrastructure. This government spending in turn may improve connectivity, productivity and therefore allow individuals to earn higher incomes, and thus improving standards of living.