Causes of poverty: low wages

IGCSE Economics 0455 – Economic Development

Learning Objective

Understand the main causes of poverty – with a focus on low wages – and evaluate how living standards, population dynamics, differences in development and international trade influence poverty and overall economic development.

5.1 Living Standards

Key Indicators (syllabus requirement)

Why Real GDP per head (PPP) is Preferred to Nominal GDP per head

• PPP adjusts for differences in price levels, allowing a “real” comparison of purchasing power.
• Nominal GDP uses current market exchange rates, which can be volatile and do not reflect domestic price differences.

Extra Material (useful for extension)

• GNI per head – total income earned by residents (including abroad). Helpful when discussing remittances, but not required by the syllabus.

Comparative Example (illustrates the gap between a developed and a developing country)

5.2 Poverty

Definitions (syllabus requirement)

• Absolute poverty – inability to meet basic physical needs (food, shelter, clothing, health). Measured against a fixed poverty line (e.g., $1.90 a day).
• Relative poverty – living with an income or consumption level far below the average in a given society (commonly < 60 % of median income).

Full Set of Causes of Poverty (syllabus 5.2)

1. Low wages
2. Unemployment or under‑employment
3. Ill‑health, disability or ageing
4. Low levels of education and skills
5. Geographical isolation
6. Discrimination (gender, ethnicity, caste, etc.)
7. Informal‑economy employment
8. Environmental factors (natural disasters, climate change, poor infrastructure)

Low Wages – In‑Depth Look (focus for AO2)

Low wages are a direct cause of poverty because they provide insufficient income to reach the poverty line. The main reasons are grouped below to help students organise their answer.

• Structural factors

  • Excess labour supply → competition drives wages down.
  • Low productivity due to outdated technology or poor working conditions.

• Institutional factors

  • Weak labour‑market institutions – no or low minimum‑wage law, weak unions, poor enforcement.
  • Prevalence of informal‑sector work – typically lower pay and no social protection.

• Human‑capital factors

  • Insufficient skills and education → low productivity → low pay.

• Discriminatory factors

  • Systematic wage differentials based on gender, ethnicity or caste.

Measuring the Impact of Low Wages

Weekly income = Hourly wage × Hours worked per week.

If weekly income < weekly poverty threshold → the worker is classified as poor.

Consequences of Low Wages (AO2)

1. Reduced household consumption and savings → weaker aggregate demand.
2. Higher incidence of malnutrition, disease and lower life expectancy.
3. Limited ability to afford education → perpetuates the low‑skill, low‑wage cycle.
4. Greater reliance on state welfare or informal safety nets.
5. Lower overall economic growth because of reduced productivity and demand.

Policy Measures to Reduce Poverty (full syllabus list)

• Economic‑growth policies – investment, infrastructure, technology.
• Education & health programmes – raise human capital.
• State‑provided benefits – cash transfers, food subsidies, universal health care.
• Progressive taxation – redistributes income from rich to poor.
• Minimum (or national) wage legislation – sets a wage floor.
• Strengthening labour‑market institutions – unions, collective bargaining.
• Formalisation of the informal sector – registration, social security.
• Anti‑discrimination laws – promote equal pay for equal work.
• Targeted programmes for vulnerable groups – elderly, disabled, women.

Evaluation Point (AO3)

Cash‑transfer programmes can lift households out of absolute poverty in the short‑run, but they may create dependency, can be fiscally unsustainable in low‑revenue economies, and do not address the underlying low‑wage structure.

Suggested Diagrams (Paper 1 & Paper 2)

• Labour‑market supply & demand showing the equilibrium wage, a minimum‑wage set above equilibrium, the resulting wage increase and the unemployment surplus.
• Lorenz curve with Gini coefficient – illustrates income inequality and its link to relative poverty.
• Poverty‑line diagram – horizontal line on a distribution of incomes to show the proportion below the line.

5.3 Population

Key Rate Definitions (syllabus requirement)

• Birth rate – live births per 1,000 population per year.
• Death rate – deaths per 1,000 population per year.
• Natural increase – birth rate minus death rate.
• Net migration – immigrants minus emigrants per 1,000 population.
• Population growth rate – (natural increase + net migration) ÷ total population × 100 %.

Reasons for Variation in Population Growth

Effects of Population Size & Structure on Development

• Size – Very large populations can strain natural resources and public services; very small populations may lack economies of scale.
• Age structure

  • Youth bulge – Potential demographic dividend if jobs and education are available.
  • Ageing population – Increases health‑care and pension costs; may reduce labour‑force participation.

• Dependency ratio – High ratio (many young or old dependents) reduces per‑capita income and fiscal capacity.

Additional Syllabus Points

• Optimum population theory – The idea that there is a population size at which the highest standard of living can be achieved; beyond this point, per‑capita resources fall.
• Population ageing and health‑care spending – Older populations tend to require more medical care and pensions, putting pressure on government budgets and potentially crowding out investment in other areas.

Suggested Diagram

Population pyramid comparing a developing country (wide base, narrow top) with a developed country (narrow base, broader middle, larger top). Label the “youth bulge” and “ageing” sections.

5.4 Differences in Economic Development

Comparative Table of Two Countries

Key Reasons for the Development Gap (cause side – AO2)

1. Human capital – differences in education, health and skills.
2. Physical capital – machinery, infrastructure and technology.
3. Productivity – higher output per worker in developed economies.
4. Institutional quality – property rights, legal system, governance.
5. Access to and use of technology & innovation.
6. Geographical factors – climate, disease burden, natural‑resource endowments.

Consequences of International Differences (AO2)

• Trade patterns – developed countries export high‑value‑added goods; developing countries often export primary commodities, exposing them to volatile terms of trade.
• Income inequality – large gaps in per‑capita income lead to relative poverty and social tension.
• Migration flows – workers move from low‑wage to high‑wage economies, affecting labour markets in both origin and destination.
• Investment patterns – capital tends to flow to countries with higher returns, potentially widening the development gap unless mitigated by aid or policy.
• Policy implications – need for development assistance, technology transfer, and institutional reforms to narrow the gap.

6 International Trade & Globalisation

Why Countries Trade (Comparative Advantage – syllabus)

• Specialise in goods/services with the lowest opportunity cost.
• Gain from increased total output → higher living standards for all trading partners.

Benefits of Free Trade (Paper 1)

1. Access to a larger variety of goods at lower prices.
2. Stimulates competition and innovation.
3. Provides developing countries with foreign‑exchange earnings.
4. Enables economies of scale and lower average costs.

Potential Disadvantages (Paper 2 evaluation)

• Domestic industries may be out‑competed → job losses and regional decline.
• Greater exposure to volatile world markets and external shocks.
• Risk of a “race to the bottom” on labour and environmental standards.
• Terms of trade may deteriorate for primary‑commodity exporters.

Key Drivers of Globalisation

• Advances in transport and communications (container shipping, internet).
• Liberalisation of trade policies (WTO, regional trade agreements).
• Growth of multinational corporations (MNCs) and foreign direct investment (FDI).
• Financial integration – capital flows, foreign‑exchange markets.

Trade Restrictions & Typical Economic Effects

Foreign‑Exchange Basics (Paper 1)

• Exchange rate – price of one currency in terms of another.
• Appreciation makes imports cheaper and exports more expensive; depreciation does the opposite.
• Current‑account balance = (Exports – Imports) + Net income from abroad + Net transfers.

Suggested Diagram

Supply‑and‑demand diagram for a particular good showing the effect of a tariff (upward shift of the supply curve), the resulting higher domestic price, reduced quantity imported and the area of government revenue.

Link to Government & Macro‑Economic Policy (Unit 4)

• Fiscal policy – Increased public spending on health, education and social welfare can directly reduce poverty.
• Monetary policy – Low interest rates stimulate investment and job creation, indirectly helping the poor.
• Supply‑side measures – Infrastructure investment, deregulation and tax incentives raise productivity and wages.
• Exchange‑rate policy – A competitive (depreciated) currency can boost export‑oriented employment, but may raise import prices for low‑income households.

Summary

Understanding poverty requires linking low wages to broader structural, institutional and human‑capital factors. Living‑standard indicators (real GDP per head, HDI) show the gap between rich and poor nations, while population dynamics influence the size of the labour force and the pressure on resources. Differences in development arise from variations in capital, productivity, institutions and geography, shaping trade patterns and the effectiveness of government policies. By analysing these inter‑relationships, students can evaluate how policies such as minimum‑wage legislation, cash transfers, education investment or trade liberalisation can alleviate poverty and promote sustainable economic development.