CAUSES OF POVERTY ESSAY

MICRO MACROECONOMICS
[JUNE 2014: WORK AND LEISURE (OCR)]
ANALYSE THE MAIN CAUSES OF POVERTY IN THE UK (15)
KNOWLEDGE (DEFINITIONS):
• Absolute poverty is the inability to purchase the basic necessities of life. Relative poverty
is a situation of being poor relative to others; people living in households with income
below 60% of average disposable income (adjusted for household size)
APPLICATION / ANALYSIS:
• A large cause of poverty is unemployment. This is likely to push people closer to
absolute poverty as some households may have no income from employment and be in
a situation where they are relying on benefits alone. Relative poverty may increase as a
result of the unemployment trap as the unemployed may believe that their income from
benefits is greater than what they would get if they had a job, or possibly there are too
little jobs available for them to enrol in. This means that when incomes rise, the income
of the unemployed is likely to rise at a slower rate relative to the growth of real income
per capita, as benefits tend not to rise as fast as changes in income per capita as there
are limits to how quickly the government is willing to increase spending on benefits
• The problem of unemployment, and its contribution to poverty, is made particularly
more damaging when the unemployment is long-term unemployment reflecting a state
of hysteresis. This can be caused due to firms not wanting to hire people who have been
out of work for a very long time (as their skills would have deteriorated) or simply
because the ex-worker has now become discouraged from looking. The ignition of this
can often be immobility of labour leading to initial structural unemployment, which then
serves to keep people trapped in poverty (either in a state closer to absolute poverty or
one of worsened relative poverty) due to persistently low incomes (in terms of benefits)
• A lack of skills and qualifications is also another major cause of poverty. The skills and
qualifications gained through education and training serve to increase the MRP of
workers with said skills and qualifications. In many cases, social attitudes of people living
in certain areas can lead to education and training being under consumed and so not
being fully taken advantage of, and on top of that, there may be more stress on
traditional family values and thus family ties in said areas. This means that any of these
individuals who do manage to find a job are likely only to be able to obtain low wages
(due to lower MRP), and those who can’t are more likely to be prone to structural
unemployment. This worsens the state of relative poverty (and pushes some closer to
absolute poverty) which can be made worse if skills shortages are occurring, allowing
skilled workers to command higher wages thus raising the gap between high and low
income earners. The effects of this can be shown on a graph:

Written By: Kevin Longe 1

 CAUSES OF POVERTY ESSAY
MICRO MACROECONOMICS
• Assuming labour supply to be constant (for the sake of simplicity), the difference in
wage between those who are highly skilled, and those who are not, can be seen clearly.
The MRP of the unskilled workers (MRP1 (LD1)) is more wage elastic and is of a lower
level, resulting in wages of W1 and a quantity of labour employed of level L1. The MRP of
the skilled workers (MRP2 (LD2)) is more wage inelastic and is of a higher level, resulting
in wages of W2 and a quantity of labour employed of level L2. It can be seen from the
graph that the difference in wages (W2 – W1) is a sign of relative poverty, and that the
wage of unskilled workers (W1) is contributing to their incomes being squeezed by the
purchases of basic life-sustaining goods, due to their wages being of the low level W1
• Lastly, there is also the effect of the poverty trap. This can occur when those trying to
get out of poverty, by raising their disposable income, find themselves unable to do so
due to any rises in their total income resulting in them paying more in tax and receiving
less in benefits. This can push people closer to absolute poverty as their incomes are
more squeezed as a result of having to use a relatively high proportion of their
disposable income on basic life-sustaining goods

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Written By: Kevin Longe 2