To understand how low wages contribute to poverty and to analyse the underlying causes.
1. What is Poverty?
Poverty is the condition of not having enough resources to meet basic needs such as food, shelter, clothing and healthcare. In economic terms, a person is considered poor if their income is below the poverty line.
2. Low Wages as a Direct Cause of Poverty
Low wages mean that workers receive a small amount of money for the time and effort they put into producing goods and services. When wages are below the poverty line, workers cannot afford basic necessities, leading to persistent poverty.
3. Why Do Low Wages Occur?
Insufficient Skills and Education – Workers lacking education or vocational training are less productive and command lower pay.
Excess Labour Supply – High unemployment or under‑employment increases competition for jobs, pushing wages down.
Weak Labour Market Institutions – Absence of minimum‑wage laws, weak trade unions, and poor enforcement of labour standards.
Informal Economy – Jobs in the informal sector often pay less and provide no social security.
Discrimination – Gender, ethnicity or age discrimination can result in lower wages for certain groups.
Low Productivity – When workers use outdated technology or have poor working conditions, their output per hour is low, leading to low pay.
4. Measuring the Impact of Low Wages
The relationship between wages and poverty can be illustrated with a simple calculation:
\$\text{Weekly Income} = \text{Hourly Wage} \times \text{Hours Worked per Week}\$
If the weekly income is less than the weekly poverty threshold, the worker is classified as poor.
5. Example Table: Wage Levels vs. Poverty Line
Hourly Wage ($)
Hours Worked per Week
Weekly Income ($)
Poverty Line (Weekly) ($)
Status
2.00
40
80
120
Poor
3.00
40
120
120
At Poverty Line
4.00
40
160
120
Not Poor
6. Consequences of Low Wages
Reduced household consumption and savings.
Higher incidence of malnutrition, poor health and lower life expectancy.
Limited access to education, perpetuating the low‑skill cycle.
Increased reliance on government welfare or informal safety nets.
Lower overall economic growth due to reduced aggregate demand.
7. Strategies to Raise Wages and Reduce Poverty
Implementing a statutory minimum wage.
Investing in education and vocational training to improve skill levels.
Strengthening labour unions and collective bargaining.
Promoting formalisation of the informal sector.
Encouraging productivity‑enhancing technologies and better work practices.
Enforcing anti‑discrimination legislation.
8. Suggested Diagram
Suggested diagram: Supply and demand curves for labour showing how a minimum wage set above the equilibrium wage creates a surplus of labour (unemployment) but raises wages for those employed.
9. Summary
Low wages are a fundamental cause of poverty because they directly limit the ability of individuals to meet basic needs. The root causes include inadequate skills, excess labour supply, weak institutions, informal employment, discrimination and low productivity. Raising wages through policy measures and human‑capital development can break the poverty cycle and support broader economic development.
10. Practice Questions (IGCSE style)
Define the poverty line and explain how it is used to identify low‑wage poverty.
Using the table above, calculate the weekly income of a worker earning \$2.50 per hour and working 35 hours per week. State whether they are above or below the poverty line of \$120.
Discuss two reasons why low wages persist in developing economies.
Explain how a minimum wage can both reduce poverty and potentially increase unemployment.
Suggest two policies that could improve workers’ skills and thereby increase wages.