Poverty Trap

POVERTY TRAP IS a term used to describe several similar phenomena. As an unemployment trap, it refers to a situation in which an increase in income from working leads to an overall decrease in income because of a loss of benefits or other payments. Another form of poverty trap is that suffered by low-wage workers who are unable to find alternative forms of employment that would lift them out of the comparative poverty in which they live.

This kind of poverty affects sectors such as domestic care, factory work, and cleaning. The incidence of people trapped in this way has risen in industrialized countries when the ability of workers to organize themselves across different workplaces is limited, where there is a high rate of (official or unofficial) labor migration acts to depress wage rates, and when international or regional outsourcing is possible.

Women are likely to be particularly affected by the poverty trap, as they are more likely to have responsibilities for childcare, and working outside the house means that it is necessary to make new and often costly arrangements for child supervision. People who receive benefits for disability, illness, or other inability to work are also subject to this condition. Anecdotal evidence of large numbers of people misusing the benefit system in this way is rarely borne out by genuine analysis.

Means of combating the poverty trap include earned tax credits, implementing a minimum wage rate and keeping it at a suitable level, and providing additional child support or healthcare services, among other forms of redistribution. Each of these methods is likely to be expensive and potentially incommensurate with a low tax-rate regime. Societies will decide whether they prefer to maintain comparatively high levels of tax so that revenue can be redistributed to those trapped in poverty, with the attendant benefits that are associated with greater levels of equity.

Alternatives include promoting labor mobility, so that people are more prepared and willing to move into different types of jobs or different geographical locations where higher-paying work is available. This may also require transfer payments to meet retraining or relocation costs. Countries with very powerful philanthropic or religious organizations, such as the United States and Saudi Arabia, can avoid these costs if they are borne by such charities. In most developing countries, as pointed out powerfully by Hernando de Soto, the inability of the poor to have their property properly recognized in law means they are unable to obtain benefits, such as loans or other forms of financing, to invest in their futures. In these cases, thoroughly established and policed property rights regimes are most urgently needed.

A third use of the term poverty trap is that which represents the national level. The United Nations Conference on Trade and Development (UNCTAD) has argued that many of the least developed countries are caught in a form of poverty trap when they are reliant on primary commodities for national wealth. Globalization processes, as currently constituted, intensify these sets of problems.

The way to counter national poverty traps, it argues, is through more effective aid and debt relief, a more supportive international environment, and policies recognizing the marginalization of the world's poorest countries and the interdependencies of the global economy.

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