Poverty refers to the poorest of society. A common definition (although not perfect) is the "dollar-a-day" poverty line. This is used by the UN and is defined as all people who live on less than approximately one USD a day as being in poverty. But, poverty can be measured in terms of absolute poverty and relative poverty. Absolute poverty measures the amount of people living below a certain income such as the poverty line or the number of households who are not able to afford basic goods and services. Relative poverty measures how much a household’s financial resources are below the average income threshold. Relative poverty is more tightly related to income inequality. For example, even those considered as in poverty or homeless or exceedingly poor in the USA would be considered quite well off in some other third world country.
As economics deals with the allocation of wealth and resources, poverty is a pressing issue in economics. When members of the population are not in the labour force, they are unable to receive higher wages that are distributed from economic growth. Although many countries have experienced economic growth over the past years, income and wealth is still unevenly distributed. This can be seen as an example of a “poverty trap”, which is “any self-reinforcing mechanism which causes poverty to persist”¹. The trap will persist if no steps are taken to end the cycle.
Unemployment is a key variable in poverty, as well as the increase in number of workless households. Households with no members of a family employed are dependent on state welfare to survive. Increases in direct and indirect taxes also contribute to the relative poverty rate because households without employed family members will not afford goods and services.
1. Costas Azariadis and John Stachurski, "Poverty Traps," Handbook of Economic Growth, 2005, 326.