Causes of Poverty and Inequality and Its Impact on Economic Issues

Relative Poverty

In contrast to absolute poverty the relative poverty measures the extent to which a household’s financial resources is below an average line for the economy. This called a poverty line. For example a poverty line can be set at say 60% below median income.

Relative poverty exists even with the social security system in most advanced countries. It exists due to many reasons. The major reasons are complex by nature. However, it exist because of economic cycles producing unacceptable levels of unemployment, social security dependency, structural issues of a market economy, casual nature of work force, liberalization of labor market reforms and due to the market incentives of the market economies. As well, due to the rapid technological impact on work patterns and the dismantling of social security in most advanced industrialized countries because of welfare reforms.

Economic reasons of minimizing poverty and inequality

Excessive inequality produced by the market to achieve vertical equity. In addition each one unit of money spent is an economic vote. That is, many economic voters become disenfranchised. In other words resources go to where demand and profit is highest. Excessive poverty also threatens social cohesion and it puts pressure on welfare system and produces crime and other externalization cost to the economy. The most important reason why poverty matters in an economic sense is that it destroys incentives and there fore loss of long run potential output of a country. Poverty also produces if it endures difficult to solve long term unemployment problem which exists in many advanced market economies.

Government Policy to reduce Poverty

In most market economies a mix of policies are used to reduce income inequality by tax reform particularly by progressive taxation system, welfare payments system which do not produce unemployment trap and welfare dependency. As well, poverty can be resuced by specific labor market legislation like equal Pay, minimum wage legislation and welfare to work programs and labor market programs to train and re-train workers to reduce long-term unemployment, Regional development programs where there is high level of unemployment compared to the national unemployment rate. Changes to the immigration programs on skilled basis and shortages, programs to make the workforce entering by giving incentives to stay longer and to acquire more advanced education and continuous learning affecting the participation rate of the younger workforce with less skills. In addition, the state governments can provide concessions to low income families some services at reasonable prices.

All the government policies have positive and negative effects on the economy as a whole and may sometimes increase poverty by increasing unemployment and also affect or distort market processes and create issues of efficiency of the market to work as intended. However, as inequality arises because of the market processes it can produce excessive income and wealth which can be costly than the benefits of income inequality produced by the market as an economy as a whole and in these circumstances government intervention to reduce income inequalities is essential and necessary on economic grounds alone.

Conclusion

As discussed above, income inequality and poverty is important in an economic sense. It matters because it has economic consequences for the economy as well excessive poverty also causes externalization where the market has produced and it is a form of market failure. In this sense, government has a legitimate reason on the grounds of equity and in terms of correcting externalizing issues to resolve to intervene appropriately to reduce excessive income inequality in an economy. In addition, as income inequality grows in any economy because of global and other issues it is necessary to reduce poverty as it poses economic costs than benefits to the economy as a whole. In broader sense fairer distribution of income also enables the economy to be more response to fiscal policy because it increases marginal propensity to consume and there fore the effectiveness to stabilize the economy from excessive boom bust cycle which produces more unemployment and poverty. In this sense, Poverty and inequality is important policy consideration with other objectives .