Causes of Inequality & Poverty (DP IB Economics)

The Causes of Inequality & Poverty

Causes of Poverty

• There are many causes of poverty. However, poor countries have several common characteristics which can be summarised in a poverty cycle diagram
   

Poverty is caused by a lack of both economic growth and human development 

• Low wages represent the intersection of economic growth and human development and are the major cause of poverty

  • Low wages are usually the result of unemployment, informal employment, a lack of skills, or a primary sector based economy
     

• Education and healthcare cost money and with lower wage levels these are not accessible, resulting in poor human capital

  • People find it harder to stay well or to recover from illness resulting in lower productivity and shorter life expectancy
      

• Low productivity results in low wages and the cycle continues

• Populations with a large number of dependents (old people and children) for each working household tend to experience higher levels of poverty

Causes of Inequality

• There are numerous factors that cause wealth and income inequality

• It is generally true that developed countries have a larger tax base and are able to provide a better level of support to the poorest households in the economy, than developing countries are able to

Cause of Wealth & Income Inequality

The Costs of Income & Wealth Inequality

• Capitalism is at the heart of free market economics

• Under Capitalism, inequality is inevitable

  • Workers with higher skills receive higher wages

  • Workers with little to no skills receive little to no wage

  • Individuals with higher income will acquire more assets leading to higher levels of income

    • In turn, they can keep on acquiring assets

  • Individuals with lower income will find it hard to acquire assets
    

• The principles of capitalism are considered important as the incentive to acquire income raises productivity and output 

• However, the long-term outcome of capitalism is that the factors of production become concentrated in ownership with relatively few individuals developing extreme wealth, at the expense of many who lose out  

The costs of inequality

1. Impact on economic growth

   • At some point, increasing levels of inequality becomes a disincentive for workers to work and be productive

   • This means that some resources (labour) in the economy are not being used efficiently. National output falls and economic growth slows

   • Government unemployment payments and welfare benefits may increase

   • Government tax revenues may decrease with increasing inequality
      

2. Impact on living standards

   • If the inequality gap grows, the rich get richer and the poor, relatively poorer

   • Over time, this will reduce the standard of living

   • The wealthier will access better education and healthcare creating even less opportunity for poorer households in the future
     

3. Impact on social stability

   • More equal societies tend to be more stable, tolerant and considerate with lower levels of crime and better standards of living

   • Less equal societies tend to be characterised by political instability, strife, social unrest - and in extreme cases this can lead to revolutions