Understanding absolute and relative poverty is crucial for analysing global and national inequalities. This topic explores definitions, measures, causes, and poverty alleviation policies.
Definitions and distinctions
Absolute poverty
Absolute poverty refers to a condition in which individuals are unable to secure the minimum level of income required to meet the most basic human needs for survival. These essential needs include:
Food and clean drinking water
Adequate housing or shelter
Healthcare services
Basic clothing
Sanitation and hygiene
This concept of poverty is fixed and universal in its threshold and is commonly measured using the international poverty line. According to the World Bank, this line is currently set at 2.15/day).
Relative poverty is dynamic and context-dependent, based on how income is distributed within a society.
Focus:
Absolute poverty highlights extreme deprivation.
Relative poverty focuses on inequality and living standards.
Application:
Absolute poverty is commonly used in global development discussions.
Relative poverty is used in national policy-making and social welfare evaluation.
Measures of poverty
Measures of absolute poverty
Headcount index
The headcount index is the most basic measure of absolute poverty. It refers to the proportion of a population living below the poverty line.
Formula:
Headcount index = (Number of people below the poverty line) / (Total population)
This measure is simple and intuitive. It allows policymakers and international organisations to assess how widespread poverty is in a specific country or region.
Advantages:
Easy to calculate and communicate.
Useful for tracking changes over time or comparing countries.
Disadvantages:
It does not reflect the depth of poverty – i.e., how far below the poverty line people fall.
It ignores inequality among the poor.
Poverty gap index
The poverty gap index is a more refined measure. It estimates the average shortfall from the poverty line, expressed as a proportion of that line. It reflects both the incidence and intensity of poverty.
Formula:
Poverty gap = (Sum of income shortfalls of all people below the poverty line) / (Total population × poverty line)
Advantages:
Measures how poor the poor are, not just how many are poor.
Useful for estimating the total resources needed to eliminate poverty.
Disadvantages:
Does not account for inequality among those below the poverty line.
Still focuses purely on income, excluding other aspects such as education or health.
Measures of relative poverty
Income thresholds
Relative poverty is often measured using income thresholds based on national statistics. In the UK, the threshold is typically set at 60% of the median household income.
For example, if the national median income is £30,000, then those earning below £18,000 would be considered relatively poor.
Advantages:
Reflects standards of living within a specific society.
Highlights groups at risk of social exclusion.
Disadvantages:
A rise in median income (e.g. from economic growth) may increase relative poverty even if no one's income falls.
Sensitive to short-term fluctuations.
Inequality-adjusted income distribution
This measure examines how income is spread across the population, rather than using a fixed threshold.
It is closely related to:
Gini coefficient: a number between 0 (perfect equality) and 1 (maximum inequality).
Lorenz curve: a graphical representation of income inequality.
While not direct measures of poverty, these tools help to understand how income disparities contribute to relative poverty.
Causes of changes in poverty
Economic growth or recession
Economic growth can play a powerful role in reducing both absolute and, potentially, relative poverty:
Job creation: More employment opportunities raise household incomes.
Higher tax revenues: Governments can invest in public services and welfare.
However, the effect depends on whether growth is inclusive:
In some countries, such as China, rapid industrialisation has lifted millions out of absolute poverty.
But if the benefits of growth are captured by the wealthy, relative poverty may increase.
Conversely, a recession can lead to:
Rising unemployment
Falling real wages
Increased welfare dependency
These trends worsen both absolute and relative poverty, especially among low-income and vulnerable groups.
Employment and wages
Changes in employment patterns can influence poverty:
High employment reduces poverty, provided jobs pay sufficient wages.
Informal or precarious work (e.g. gig economy jobs) may offer income but often lacks job security, healthcare, or pensions.
Wage stagnation amidst rising living costs can deepen relative poverty, even if absolute poverty rates remain stable.
Labour markets with strong minimum wage laws, unions, and skills development tend to show lower poverty rates.
Government policy
Taxation
Progressive taxes (e.g. income tax bands that increase with earnings) redistribute wealth and reduce inequality.
Revenues from such taxes can fund healthcare, education, and housing for low-income groups.
In contrast, regressive taxes like VAT may place a higher burden on the poor relative to their income.
Welfare programmes
Effective social safety nets can prevent individuals from falling into poverty due to job loss, illness, or family breakdown.
Examples include Universal Credit in the UK or SNAP benefits in the US.
However, inadequate coverage or low benefit levels can render such systems ineffective.
Education
Accessible and quality education reduces poverty by increasing individuals’ productivity and employability.
Early childhood education, vocational training, and higher education access are all linked to lower long-term poverty risks.
Education also promotes intergenerational mobility, breaking cycles of poverty.
Technological change, trade, and globalisation
Technology boosts productivity and can create high-skilled jobs. But it may also lead to automation of low-wage work, increasing relative poverty.
Trade liberalisation expands markets and reduces prices, but it can also lead to job losses in uncompetitive industries.
Globalisation helps reduce absolute poverty through foreign investment and market access but may exacerbate inequality within countries.
In many economies, the shift toward capital-intensive industries has favoured skilled workers and capital owners, leaving others behind.
Evaluating poverty alleviation policies
Targeted welfare programmes
These are designed to provide support to specific groups most at risk of poverty:
Conditional cash transfers (e.g. Bolsa Família in Brazil) provide income in exchange for actions like school attendance or vaccinations.
Unemployment benefits and housing subsidies provide temporary relief during economic hardship.
Strengths:
Cost-effective when well-targeted.
Encourages desirable social behaviours.
Weaknesses:
Risk of exclusion errors (missing those in need).
May discourage work if not carefully designed.
Inclusive education
Ensuring that all children have access to quality education is a key long-term solution to poverty.
Education improves human capital, raising productivity and potential earnings.
Inclusive education targets disadvantaged groups (e.g. girls, rural populations, disabled individuals).
For maximum impact:
School systems must also offer teacher training, modern facilities, and relevant curricula.
Education must align with labour market demands.
Progressive taxation
Progressive taxes on income, wealth, and capital gains can reduce inequality and fund essential services.
Advantages:
Promotes redistribution.
Can reduce relative poverty effectively.
Challenges:
High taxes may discourage enterprise or lead to tax avoidance.
Requires efficient administration and public trust in government spending.
Integrated policy approach
Poverty alleviation is most effective when multiple policies are coordinated:
Combine economic development with social safety nets.
Encourage inclusive growth through targeted investment.
Build resilient institutions that ensure accountability and access for all.
Addressing both absolute and relative poverty requires understanding the economic, social, and political dimensions of deprivation.
FAQ
Poverty measures such as the international poverty line use Purchasing Power Parity (PPP) adjustments to account for variations in the cost of living across countries. PPP allows economists to compare income levels and poverty thresholds by considering how much a set amount of money can buy in different economies. For instance, $2.15 in a low-income country may purchase more essential goods than in a high-income country, so the PPP-adjusted figure ensures meaningful comparisons. Within countries, especially those with regional disparities, poverty measures may also consider spatial price indices to reflect cost of living differences. For example, urban areas often have higher housing and food prices than rural regions. In some advanced economies, governments adjust benefit entitlements or poverty lines regionally to reflect this. Despite these tools, challenges remain, especially in accurately capturing informal economic activity or non-monetary exchanges, which are more prevalent in developing nations. This can lead to underestimation or overestimation of real poverty levels.
Multidimensional Poverty Indices (MPIs) go beyond income to capture a broader understanding of poverty by including non-monetary deprivations. These indices typically assess several key dimensions such as health, education, and living standards, using indicators like child mortality, school attendance, access to clean water, electricity, and cooking fuel. The most widely recognised MPI is developed by the United Nations Development Programme (UNDP) and Oxford Poverty and Human Development Initiative (OPHI). Unlike income-based measures, which only assess how much money individuals earn or spend, MPIs reflect the real conditions of daily life. For example, a household may earn above the absolute poverty threshold but still lack access to clean drinking water or proper sanitation. MPIs are especially useful in developing countries where infrastructure gaps are severe. They enable more targeted policymaking by identifying specific areas where intervention is needed. However, MPIs are more data-intensive and can be harder to compare across countries due to differences in indicator selection.
Relative poverty can have long-lasting and more profound impacts on children compared to adults. Children in relatively poor households are more likely to experience educational disadvantages, such as lower school readiness, reduced academic performance, and limited access to extracurricular opportunities. Poor nutrition, overcrowded housing, and lack of internet access can hinder cognitive development and school engagement. Moreover, stress from financial instability can lead to emotional or behavioural issues, affecting social integration and self-esteem. Unlike adults, children cannot compensate for poverty through additional work or financial decisions. The effects of relative poverty during early life stages can be intergenerational, limiting future earnings and perpetuating the poverty cycle. Governments often attempt to address this through child benefits, free school meals, or educational support schemes, but disparities persist. In wealthier societies, the impact of relative poverty on social exclusion is particularly significant, as children may feel stigmatised or isolated due to their inability to participate in social norms or peer activities.
The poverty trap refers to a situation where individuals or households cannot escape poverty due to structural or systemic barriers, even if they are working or receiving support. This concept often applies to relative poverty, especially in developed economies. Common features include low wages, high marginal tax rates on benefits, and inaccessible education or childcare. For instance, someone might find employment but lose housing or childcare benefits, making them worse off overall—a situation known as the benefit cliff. In such cases, the incentives to work or increase earnings are reduced, reinforcing dependency on state support. Additionally, those in relative poverty often lack the social capital or financial resources to invest in skills or relocate for better opportunities. Breaking the poverty trap requires policies that smooth transitions into work, such as in-work benefits, training schemes, and affordable childcare. It also involves restructuring tax and welfare systems to ensure work always results in a tangible financial improvement.
Yes, relative poverty is a contextual and comparative measure, so it is possible for individuals within high-income households to experience forms of relative deprivation. This typically occurs when household income is high in absolute terms but still significantly below the national median, especially in extremely high-income societies. For example, in countries with high living costs and elevated median incomes—such as Norway or Switzerland—a household earning what would be considered a comfortable income elsewhere might still fall below the 60% threshold. Additionally, household composition matters: a large family with one income might face resource strain despite a seemingly high salary. Relative poverty also encompasses social exclusion, so individuals may lack access to key resources, services, or experiences (e.g. internet, transportation, or cultural activities), even in relatively affluent settings. Psychological factors, such as feelings of inferiority, shame, or disconnection, can also arise from comparisons with peers or broader societal standards, reinforcing a sense of relative deprivation.
Practice Questions
Explain the difference between absolute and relative poverty.
Absolute poverty refers to a condition where individuals cannot afford basic necessities such as food, water, shelter, and healthcare. It is typically measured using an international poverty line, such as living on less than $2.15 per day. In contrast, relative poverty is defined within the context of a specific society, where individuals earn significantly less than the median income—usually below 60%. While absolute poverty focuses on survival, relative poverty highlights inequality and exclusion. Absolute poverty is more common in developing nations, whereas relative poverty is more relevant in developed countries concerned with living standards and inequality.
Assess the effectiveness of government policies in reducing relative poverty.
Government policies such as progressive taxation, welfare benefits, and inclusive education can reduce relative poverty by redistributing income and expanding access to opportunities. Progressive taxation increases government revenue from high earners, funding benefits for lower-income groups. Welfare programmes provide safety nets that support consumption and reduce income gaps. Education policies raise skill levels, improving long-term employability. However, their effectiveness depends on proper targeting, sufficient funding, and economic context. In periods of austerity, benefit cuts can worsen relative poverty. Additionally, poorly designed tax systems may discourage work or investment. Therefore, while effective in theory, implementation and political will are crucial for success.
