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Economics

In the News

The Poverty Trap- Panorama

Bob Hindle

12th October 2014

Last Monday's Panorama Worker's on the Breadline saw Richard Bilton investigating why many families and single people on lower wages are struggling to make ends meet. He interviewed families from across the country who suffer from what we know in economics as the poverty trap.

For teachers, there's a good interactive resource on the poverty trap here, produced by The Children's Society.

The poverty trap occurs when people who work earn low wages and have their incomes topped up by the government through benefit payments. Many of these low paid workers are on jobs that pay around the National Minimum Wage. As their earnings rise, the government subsidy, in the form of tax credits, falls. A man in the film lost 76p in benefits for every extra £1 he earned. For this reason, taking a promotion at a higher rate of pay might mean someone is little better off. This means people are 'trapped' in their current living standard. Zero hours contracts also mean the earnings of many are variable week to week.

In 1971, 71 000 people on low pay had their wages topped up by the government. That figure has now reached 3.3 million, costing government £28 billion per year. The highest top ups occur for people with children, in part because there has been a 77% increase in the cost of childcare over the last 10 years. Low income families have little incentive to work longer hours if they lose their childcare subsidy.

This presents a public policy problem for the government. How do they intervene- or amend- their existing interventions to solve this market failure? In Capital, Thomas Piketty argued governments should introduce a global tax on wealth to prevent rising inequality contributing to economic instability.

With the National Debt close to £1300bn, government wants to shift the solution to employers. And, at the same time, reduce the tax credits paid to those in work. Education reforms such as the 'pupil premium' are paid to schools to support students from families where income is low. Boosting life chances this way is a long-term strategy and it is uncertain as yet whether it has made an impact. The rate at which people lose their tax credits could also fall, but this would conflict with the Coalition objective of reducing social security payments.

Regulation might be a better means of government intervention. Labour has said that it will raise the National Minimum Wage to £10 per hour. The Living Wage Foundation argues that firms should be paying employees in London £8.80 and outside £7.65 per hour so that they can guarantee a certain living standard. A number of companies have agreed to do so, including Barclays, several local councils and Goldman Sachs.

Certainly, the poverty trap will not go away without government intervention.

Equality Trust research shows the richest 100 people in the UK now have as much wealth as the poorest 30% of households and that we are all the worse for it.

Bob Hindle

Economics teacher,examiner and lecturer with several years experience at A/AS, IB and IGCSE. Key interests are in the economics of India and raising social mobility through education.

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