15.2 The Poverty Trap
2 min read•june 25, 2024
Government assistance programs aim to support low-income individuals but can create unintended work disincentives. The occurs when people limit work to maintain benefits, making it hard to escape poverty. This complex issue affects economic decisions and .
Anti-poverty initiatives face challenges like cliff effects and steep benefit phase-outs. These factors, along with insufficient support for self-sufficiency, can discourage work. The illustrates how benefit reductions can create a "kink," showing no net gain in total income as earnings increase.
Government Assistance and the Poverty Trap
Work Incentives
Top images from around the web for Work Incentives
Poverty in the United States, 2014: Key charts from the U.S. Census Bureau - Journalist's Resource View original
Is this image relevant?
Work in the United States | Introduction to Sociology View original
Is this image relevant?
The Poverty Trap · Economics View original
Is this image relevant?
Poverty in the United States, 2014: Key charts from the U.S. Census Bureau - Journalist's Resource View original
Is this image relevant?
Work in the United States | Introduction to Sociology View original
Is this image relevant?
1 of 3
Top images from around the web for Work Incentives
Poverty in the United States, 2014: Key charts from the U.S. Census Bureau - Journalist's Resource View original
Is this image relevant?
Work in the United States | Introduction to Sociology View original
Is this image relevant?
The Poverty Trap · Economics View original
Is this image relevant?
Poverty in the United States, 2014: Key charts from the U.S. Census Bureau - Journalist's Resource View original
Is this image relevant?
Work in the United States | Introduction to Sociology View original
Is this image relevant?
1 of 3
- Government assistance programs (welfare, unemployment benefits) provide financial support to low-income individuals and families helping meet basic necessities
- These programs can unintentionally create disincentives to work
- Earning more income may lead to loss of eligibility for benefits or reduced assistance
- Reduction in benefits can be greater than increase in earned income resulting in net loss for individual
- Poverty trap occurs when individuals choose not to work or limit work hours to maintain eligibility for benefits making it difficult to escape poverty and achieve self-sufficiency
Anti-Poverty Initiatives
- Eligibility thresholds for assistance programs can create "cliff effects" where small increase in income leads to sudden loss of benefits discouraging work and advancement
- Program phase-out rates may be too steep with high marginal tax rates on earned income making work less attractive
- Lack of coordination between different assistance programs can result in individuals facing multiple benefit reductions simultaneously compounding disincentive to work
- Insufficient support for transitioning to self-sufficiency such as inadequate job training or childcare to help secure stable employment
- Limited consideration of regional differences in cost of living with uniform eligibility criteria not accounting for varying living expenses across different areas
Budget Constraint Line
- Budget constraint line represents combinations of goods and services an individual can afford given their income
- In poverty trap context, budget constraint line can have a "kink" or flat section when increase in earned income leads to reduction in benefits resulting in no net gain or net loss in total income
- Example scenario:
- Individual receives fixed 1,000
- For every dollar earned above 1
- Budget constraint line:
- Flat at 0 to $1,000
- Kinked at 1,000 to $1,500
- Positively sloped for earned income above $1,500 as individual no longer receives welfare
- Flat or kinked section of budget constraint line illustrates poverty trap with no incentive to work more as total income does not increase
Key Terms to Review (14)
Budget Constraint Line: The budget constraint line is a graphical representation of the maximum combinations of two goods that a consumer can purchase given their limited income and the prices of those goods. It depicts the trade-offs a consumer faces when allocating their budget across different consumption choices.
Earned Income Tax Credit: The Earned Income Tax Credit (EITC) is a refundable tax credit that provides financial assistance to low- and moderate-income working individuals and families. It is designed to supplement the earnings of eligible taxpayers, thereby encouraging and rewarding work, reducing poverty, and promoting economic self-sufficiency.
Earned Income Tax Credit (EITC): The Earned Income Tax Credit (EITC) is a refundable tax credit designed to supplement the incomes of low-to-moderate income working individuals and families. It is intended to encourage and reward work, as well as alleviate the burden of taxes for those with limited financial resources.
Economic Development: Economic development refers to the process of improving the economic, political, and social well-being of a country or region. It involves the expansion of the productive capacity of an economy, the creation of new job opportunities, and the improvement of living standards for the population.
Effective Marginal Tax Rate: The effective marginal tax rate (EMTR) is the actual rate of taxation faced by an individual or household on an additional dollar of income, taking into account the combined effects of the statutory tax rate and the phase-out of any income-tested benefits or tax credits. It represents the true marginal cost of earning an extra dollar of income.
Human Capital: Human capital refers to the knowledge, skills, and abilities that individuals possess, which contribute to their productivity and economic value. It is a crucial component of economic growth and development, as it represents the productive potential of a workforce.
Income Inequality: Income inequality refers to the unequal distribution of income and wealth within a population. It describes the gap between the highest and lowest earners in a society, and the degree to which income and resources are concentrated among a small portion of the population.
Kinked Budget Constraint Line: The kinked budget constraint line is a concept in microeconomics that describes a situation where an individual's budget constraint is not linear, but rather has a distinct kink or change in slope. This occurs when an individual faces different prices or tax rates for different levels of consumption, resulting in a non-linear budget constraint.
Means-Tested Benefits: Means-tested benefits are government assistance programs that provide aid to individuals or households based on their financial resources and income level. These benefits are designed to help those with limited financial means by offering support in areas such as healthcare, food, housing, and other essential services.
Minimum Wage: Minimum wage refers to the lowest hourly rate that employers are legally required to pay their workers. It is a government-mandated price floor in the labor market, intended to protect low-wage workers and ensure a minimum standard of living.
Poverty Trap: A poverty trap is a self-reinforcing mechanism that causes poverty to persist. It is a situation where an individual or a community is unable to escape from poverty due to a combination of factors that make it difficult to improve their economic status, leading to a cycle of deprivation that is challenging to break out of.
Social Mobility: Social mobility refers to the movement of individuals or groups within a social hierarchy, either upward or downward, in terms of their socioeconomic status, occupation, education, or income level. It is a measure of the opportunity for individuals to improve or change their social position over time.
Social Safety Net: The social safety net refers to the system of government programs and policies designed to provide a basic level of financial and social support for individuals and families in need. It is a crucial component of modern welfare states, aimed at reducing poverty, inequality, and vulnerability within a society.
Welfare Cliff: The welfare cliff refers to the sudden and significant drop in government benefits that can occur when an individual's income rises above a certain threshold, leading to a net loss in overall financial resources. This concept is closely tied to the idea of the poverty trap, where individuals may be discouraged from earning more due to the risk of losing critical social support.