Distribution of Income - Poverty
Topic Nineteen

Previous - The Labour Market and the Role of Trade Unions

Absolute Poverty and Relative Poverty

Absolute poverty is when people do not have sufficient resources to meet the basic necessities such as food, shelter and clothing that are needed for survival. Such people are said to fall below the poverty line. On the other hand, relative poverty is when people are poor when compared to others around them but may still have sufficient to survive.

Factors That Contribute To Poverty

The key factors that can result in persons being in a state of poverty are as follows:

  • unemployment or having a poor quality job – persons who are jobless and do not have the means to obtain sustainable employment are more susceptible to being poor.
  • low levels of education and skills – persons with low levels of education are also those who will be more likely to be below the poverty live. Education provides a means of mobility for people to live at a certain decent standard. Low levels of education will therefore place people below the poverty live.
  • large size and type of family – large families tend to be more likely to be in a state of poverty particularly if they are not employable. This situation is even worse in the case of single parent families.
  • living in a remote or very disadvantaged community – citizens who live in rural areas in a society particularly in areas that are far from the mainstream of a country tend to be poorer that their counterparts in the urban areas of a Such areas are usually far away from the developed areas and too remote from the productive activities.

Measures of Poverty

There are four main ways to measure poverty and inequality: the Lorenz Curve, headcount poverty ratio, the poverty line and the Gini concentration ratio.

The Lorenz Curve - The Lorenz curve is a measure of the distribution of wealth in a society. The Lorenz curve is used in economics to describe inequality in wealth or size and it is a function of the cumulative proportion of ordered individuals mapped onto the corresponding cumulative proportion of their size. As an example, a value (0.8, 0.2) means that the bottom 80 percent of the population owns 20 percent of the total wealth in society.

Figure 1

To interpret the graph above, the point (25,5) represents the hypothetical fact that the bottom 25 percent of people have 5 percent of the income, the point (50,20) shows that the bottom 50 percent of people have 20 percent of the income, and the point (75,40) shows that the bottom 75 percent of people have 40 percent of the income. The dotted line on the diagram is the 45-degree line that represents perfect income equality in an economy. We can conclude that Lorenz curves that are bowed further away from this diagonal correspond to economies with more income inequality.

Plotting the Lorenz Curve

The income distribution for five categories of employees from five different parts of a country is shown in the table below:

Figure 2

Plotting the Lorenz Curve requires calculating the cumulative percentage of the population which is the horizontal axis and the cumulative parentage for the income which is plotted on the vertical axis of the graph. First take the cumulative income (as can be seen in column 5) then take each cumulative income as a percentage of the total cumulative income (as can be seen column 6). Therefore, 10,000 + 20,000 = 30,000 and 30,000 + 30,000 = 60,000; then 60,000 + 40,000 = 100,000 then 100,000 + 50,000 = 150,000. This is how we got the values for column 5. Next take each value in column 5 as a percentage or fraction of the total which is 150,000. For example, 10,000 /150,000 = 0.07 and 30,000/150,000= 0.2 and 60,000/150,000=0.4 and 100,000/150,000 = 0.67 and 150,000/150,000 = 1. These values are in column 6. Using the values in columns 3, 6 and 7, we can plot the Lorenz Curve which is shown in Figure 17.3.

Figure 3

According to this graph, the bottom 20 percent of employees earn 0.07 percent of total income, the bottom 40 percent of employees earn 20 percent of income, the bottom 60 percent of employees earn 40 percent of income and the bottom 80 percent of employees earn 67 percent of income.

Headcount Poverty Ratio - The headcount poverty ratio or index is defined as the percentage of the population whose living standards, typically proxied by consumption, lie below a given threshold referred to as poverty line. The poverty line can be an international threshold such as $1.25 per day or $2 per day.

Poverty line – This is sometimes called the poverty threshold, is the smallest amount of money a person or a family needs to live on and to buy what is needed. People who are below this line are classified as poor.

Gini Concentration Index - The Gini index is a summary statistic of the Lorenz Curve and a measure of inequality in a population. The Gini coefficient is the relative mean difference which is the mean of the difference between every possible pair of individuals, divided by the mean size. The Gini index therefore measures the area between the Lorenz curve and a hypothetical line of absolute equality, expressed as a percentage of the maximum area under the line. Thus a Gini index of 0 represents perfect equality, while an index of 100 implies perfect inequality.

Ways to Alleviate Poverty

There are measures that can be taken by governments to alleviate poverty some of which are as follow:

Cash benefits - These are benefits aimed at directly assisting persons below the poverty line. It is based on either a contributory and non-contributory basis. Contributory benefits, such as pensions are those benefits where individuals or employers make a contribution into the national insurance scheme. Non-contributory benefits include a housing benefit, income support and social benefit which do not require a previous contribution to have been made.

Benefits in kind - Benefits in-kind are those services, such as healthcare, food stamps, transportation and education that are provided free. This results in narrowing the gap between the rich and the poor.

Legislation - Government can pass minimum wage legislation to assist the poor. Such legislation making it illegal for employers to pay employees below a certain level can go a long way to improve the social situation of the poor.

Transfer payments - Transfer payments are another method where the government attempts to alleviate poverty. A transfer payment is a one-way payment of money for which no money, good, or service is received in exchange. Governments use such payments as means of income redistribution by distributing money under social welfare programs such as social security, old age or disability pensions, student grants, and unemployment compensation.

Next - National Income