Poverty, Income Inequality and Economic Growth
There are two types of poverty:
- Relative Poverty: This is when income is less than the average income by a certain amount. For example, in the UK relative poverty is defined as income 50% less than average incomes. Therefore a rise in economic growth will cause a change in what constitutes economic growth.
Therefore, economic growth can reduce relative poverty, but also can increase relative poverty.
- Absolute Poverty: This is Income below a certain level necessary to maintain a minimum standars of living. (e.g. enough money to buy the basic necessities of food, shelter and heat.
- Therefore, economic growth should reduce absolute poverty, so long as the poorest can gain some increase in living standards from the nation’s growth.
Does Economic Growth Reduce Relative Poverty and Income Inequality?
Economic Growth will reduce Income inequality if:
- Wages of the lowest paid rise faster than the average wage
- Government benefits, such as; unemployment benefits, sickness benefits and pensions are increased in line with average wages.
- Economic Growth creates job opportunities which reduce the level of unemployment. Unemployment and lack of employment is one of the biggest causes of relative poverty.
- Minimum Wages increased in line with average earnings
Why Economic Growth May not Reduce Income Inequality and Poverty
- Economic Growth often creates the best opportunities for those who are highly skilled and educated. In recent years, in the UK, we have seen faster wage growth for highly paid jobs than unskilled jobs.
- Modern economies are creating an increased number of part time / flexible service sector jobs. In these sectors wages have been lagging behind average earnings.
- In the UK, government benefits have been indexed linked. This means increased in line with inflation. This means that benefit incomes have fallen behind average earnings.
Economic Growth will not necessarily solve unemployment. For example, growth cannot solve structural and frictional unemployment; this is unemployment caused by lack of skills and geographical immobilities.
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