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Income inequality and poverty

Income inequality: Differences in income between different groups of earners.

In most countries, income is shared out very unevenly. Some people earn far more than others, e.g. a company director may earn many times more than a shop assistant.

Absolute and relative poverty

Absolute poverty: where people do not have enough resources to meet all of their basic human needs.

Relative poverty: The standard of living is below the typical average living standards in that society.

The two types of poverty compared:

• Absolute poverty: people go without basics such as clean drinking water, food, shelter, sanitation, education and basic healthcare. The World Bank has measured it as living on less than a set amount per day, e.g. US$1.90. It is rare in developed countries, where governments make welfare payments to people in need.
• Relative poverty: people’s incomes are too low to reach the normal standard of living in their own country. In the EU, for example, people with an income below 60% of the median income are counted as living in relative poverty. There will always be some relative poverty, and the level differs between countries, as each country has its own median income.

Reasons to reduce poverty and inequality

• Meet basic needs: millions of people still do not have enough food, clean water or shelter, and many children die from hunger and disease. Ending absolute poverty would save lives and help children grow up healthy.
• Raise standards of living: people in poverty, even relative poverty, tend to have worse housing, poorer diets and less access to healthcare, so they are more likely to fall ill and die younger. Reducing poverty raises living standards. More people could also be educated, boosting economic growth, jobs and tax revenue.
• Ethical reasons: many people believe that people and governments have a moral duty to help the poor. A very small sacrifice by the rich could lift many people out of poverty.

Government intervention to reduce inequality and poverty

Progressive taxation: where the proportion of income paid in tax rises as the income of the taxpayer rises.

Three ways a government can reduce poverty and inequality:

• Progressive taxation: people on high incomes pay a bigger share of their income in tax, and people on very low incomes may pay none. Lower-income earners keep more of their income to spend on basic needs. The government can use the extra revenue from the rich to pay for benefits and public services for the poor, which narrows the income gap.
• Redistribution through benefit payments: the government uses tax revenue to make payments to people on low incomes or who cannot work, e.g. the unemployed, the sick, the disabled, single parents and the elderly. This helps them meet their basic needs and reduces both absolute and relative poverty. Poorer countries often cannot afford large benefit systems, as their tax revenue is low.
• Investment in education and healthcare: education gives people the skills they need to get jobs and earn more. Healthcare reduces child deaths, helps people live longer and keeps them well enough to attend school and work productively. However, education costs a lot, and the benefits can take many years to appear.