Causes of poverty: low wages

Economic Development – Poverty: Causes of Poverty (Low Wages)

Low wages are a key driver of poverty. When people earn too little, they struggle to buy food, shelter, and other essentials. Think of wages like the price of a pizza slice: if the slice is too cheap, you can’t afford the whole pizza, and you’ll still be hungry. In economics, the “price” is the wage, and the “pizza” is the standard of living.

Why Do Wages Stay Low?

  • Low Demand for Skills: Jobs that need specialized skills are scarce, so employers pay less for general workers.

  • High Supply of Labor: When many people compete for the same low‑wage jobs, employers can offer lower pay.

  • Weak Labor Laws: Without strong minimum wage laws or collective bargaining, workers have little power to negotiate higher wages.

  • Informal Employment: Jobs outside formal contracts often pay less and lack benefits.

  • Economic Shocks: Recessions or sudden industry changes can force companies to cut wages.

Mathematical View of Wages

The wage rate (\$w\$) can be expressed as the total wage bill (\$W\$) divided by the number of workers (\$L\$):


\$w = \dfrac{W}{L}\$

Illustrative Example

Imagine a factory that pays a total of \$10,000\$ per month to 100 workers. The average wage is:


\$w = \dfrac{10{,}000}{100} = 100\$ dollars per month.

If the factory hires 200 workers instead, keeping the same total wage bill, the new wage drops to \$50\$ dollars per month.

Factors Influencing Low Wages – Table

FactorImpact on Wages
Education & TrainingHigher skills → higher wages.
Labor Market RegulationsStrong minimum wage laws → higher wages.
Economic GrowthGrowth → more jobs, higher wages.
Informal Sector SizeLarge informal sector → lower wages.

Exam Tip Box

Tip: When answering questions about low wages, always link cause to effect and use real‑world examples. For instance, explain how a weak minimum wage law can keep wages low, and then describe the resulting poverty. Use the table above to support your points with evidence.

Quick Summary

  1. Low wages reduce purchasing power, leading to poverty.

  2. Key causes: high labor supply, low demand for skills, weak labor laws, informal employment, and economic shocks.

  3. Improving education, strengthening labor regulations, and promoting formal employment can raise wages.

  4. Use the wage formula and the table to illustrate relationships in exam answers.