Tag: poverty trap

Since Labour’s historic pledge to eliminate child poverty in a generation, poverty data has been at the forefront of political debates. The recession has created unemployment and has moved more people below the poverty line, at the same time as causing rising inequality

The causes of poverty are diverse and a recent government commissioned report has drawn attention to just one of the key factors that is pushing more families into poverty – energy bills.

Fuel poverty has become more of a concern with the cost of household bills rising and this has led to calls for more money to be invested in cutting energy bills. Fuel poverty has been redefined by Professor John Hills, the author of the report, to focus on those households with a low income and also with relatively high energy bills.

Fuel poverty is undoubtedly concerning from a moral point of view – indeed, knowing that some families are unable to afford to heat their homes causes disutility for others. However, there are also wider economic implications. If families are unable to provide heating, this may adversely affect their children’s ability to learn and complete their homework, thus negatively affecting their productivity today and arguable causing further problems in their future. While this may have little effect today, the cumulative effect on economic productivity could be substantial in the long run. Inefficiency for the macroeconomy is therefore a problem, as a child’s productive potential will not be fully realized. Furthermore, there are also health concerns, as the government notes – fuel poverty is linked to 2,700 deaths per year. Again, this creates a blight on society, but it also poses economic problems, not least due to the strain on the NHS.

Fuel poverty has long been identified as a problem that needs addressing and as the Secretary of State for Energy and Climate Change said:

‘Fuel poverty is a serious national problem and this government remains committed to doing all it can to tackle it and make sure that the help available reaches those who need it most.’

Action is already taking place to insulate the poorest homes, as a means of cutting their energy bills and the government’s ‘Warm Homes Discount’ aims to provide help to the lowest income households in paying their bills. However, there are concerns that more households will move into fuel poverty, as this new definition doesn’t include those slightly wealthier households who still have high bills or the poorer households with relatively low bills. With the economy still in a vulnerable state, the latest data showing further rises in unemployment and household bills becoming increasingly expensive, the issue of fuel poverty is unlikely to disappear any time soon. The following articles consider this issue.

Fuel poverty seen for 3 million households by 2016 Reuters (16/3/12)
Fuel poverty to rise to 8.5m, report warns (including video) BBC News, Damian Kahya (15/3/12)
Nine million will live in ‘fuel poverty’ in the next four years Independent, Simon Read (16/3/12)
Fuel poverty to rise sharply Telegraph, James Hall (16/3/12)
Call for urgent action on fuel poverty Financial Times, Sarah Neville (15/3/12)
Fuel poverty worse than estimated The Press Association (15/3/12)
3 million fuel-poor households by 2016, report claims Guardian, Mark King and Zammy Fairhurst (15/3/12)


  1. What are the causes of poverty?
  2. How has the definition of fuel poverty changed? Is the change a good one? Think about the equity and efficiency of such a change.
  3. The BBC News article says that government measures to alleviate fuel poverty could be regressive. What is meant by this and why could this be the case?
  4. What are the economic consequences of fuel poverty?
  5. We can estimate poverty by looking at the poverty headcount or the poverty gap. What is the difference between these two measures? Which one is a more accurate measure of poverty?
  6. Are there any other actions that you think would be effective in alleviating fuel poverty? Would they be cost effective?
  7. Why does Age UK fear ‘the current proposals to improve energy efficiency through the Green Deal and energy obligation schemes are a woefully inadequate response to one of the most serious issues facing our country today’?

The National Minimum Wage is a rate applied to most workers in the UK and is their minimum hourly entitlement. For adults over the age of 21, it has recently been increased to £6.08 – 15p rise. Rises have also been seen for 18-20 year olds, 16 and 17 year olds and apprentices. Undoubtedly this is good news for workers receiving the minimum wage, but what does it mean for firms and national unemployment data?

Market wages are determined by the interaction of the demand and supply of labour and when they are in equilibrium, the only unemployment in the economy will be equilibrium unemployment, namely frictional or structural. However, when the wage rate is forced above the equilibrium wage rate, disequilibrium unemployment may develop. At a wage above the equilibrium the supply of labour will exceed the demand for labour and the excess is unemployment. Furthermore, firms are already facing difficult times with the economic climate: sales remain relatively low, but costs are still high. By increasing the national minimum wage, firms will face higher labour costs and this may discourage them from taking on new workers, but may also force them into laying off existing workers.

It is hoped that the size of the increases will help low paid workers, as costs of living continue to rise, but won’t cause firms to reduce their labour force. This is one reason, in particular, why the increase in the minimum wage for young workers is smaller than that for adults. Youth unemployment is relatively high and so it is essential that firms keep these workers on, despite their increased costs.

Although the TUC has welcomed the increases in the National Minimum Wage, saying they will benefit some 900,000 workers, the General Secretary of Unison has said that it isn’t high enough.

“The rise to £6.08 is a welcome cushion, but with the price of everyday essentials such as food, gas and electricity going up massively, it won’t lift enough working people out of the poverty trap.”

The following articles consider this issue.

Minimum wage rises by 15p to £6.08 an hour Telegraph (3/10/11)
Minimum wage up by 15p to £6.08 BBC News (1/10/11)
150,000 social care workers paid below legal minimum wage, research reveals Guardian, Shiv Malik (3/10/11)
Unions want £8 an hour minimum wage Press Association (1/10/11)
Hunderds of thousands of women to benefit as minimum wage hits the £6-an-hour mark for the first time Mail Online, Emma Reynolds (29/9/11)
Unions demand minimum wage of £8 an hour Telegraph (30/9/11)
Changes will benefit workers Sky News (2/10/11)


  1. Is the minimum wage an example of a price ceiling or a price floor?
  2. If the National Minimum Wage was imposed below the market equilibrium, what would be the effect?
  3. If imposed above the market wage rate, the National Minimum Wage may create unemployment. On which factors does the extent of unemployment depend?
  4. Why is it expected that female workers are likely to be the main ones to benefit? What does this say about gender inequality?
  5. Why does the General Secretary of Unison not believe the higher National Minimum Wage will help people out of the poverty trap?
  6. How will the National Minimum Wage affect a firm’s costs of production. Illustrate the likely impact on a diagram.

One of the key issues tackled during Labour’s term was poverty. In 1997, the UK had one of the worst child poverty rates in Europe (20% of the population) and so Labour made a concerted effort to move more people out of poverty than ever before. Low income was defined as income below 60 per cent of median income. As Chapter 1 from the first “Data and reports” link below states:

Over the period 1994/95 to 2008/09, the percentage of the population below 60 per cent and 70 per cent thresholds of contemporary median income showed slight falls on both Before Housing Costs and After Housing Costs bases. …The proportion and number of the population below low-income thresholds … fell substantially over the same period – with proportions falling by around one half.

Over the period 1994/95 to 2008/09, there was a marked fall in the proportion of children below low income thresholds held constant in real terms. 2008/09 has shown a fall compared to 2007/08.

Despite these improvements, there is a high concentration of people just above the 60% of median income level. And, although poverty rates have fallen since 1997, income inequality remains stubbornly high, with a post-tax-and-benefit Gini co-efficient hovering around 0.38 since 1992, compared with around 0.30 in the late 1970s/early 1980s.

As recession set in, there were concerns about the effect it would have on poverty figures. However, according to the Department for Work and Pensions (DWP), throughout 2008 and 2009 both children and pensioners saw their position improve, as hundreds of thousands were lifted out of poverty. According to the DWP’s annual Households Below Average Income report, mean take-home incomes grew for the seventh consecutive year – by 1% in 2008/9.

Whilst the most vulnerable seem to have survived the first test, the next will come with the substantial budget cuts the UK will see, as the government attempts to reduce the budget deficit. Poverty campaigners have warned that attempts to reduce the deficit must not be detrimental to poverty figures, by taking benefits away from those who need them. As Michelle Mitchell, the charity director at Age UK said: “Clearly there are huge challenges ahead for the new government, but now is the time to renew the fight against pensioner poverty and commit to eradicating it once and for all.”

Campaigners warn Coalition not to jeopardise falling poverty rates Guardian, Katie Allen (20/5/10)
Child poverty ‘historically high’ The Press Association (20/5/10)
Labour kept poverty in check, says IFS Financial Times, Nicholas Timmins (22/5/10)
Child poverty in Scotland increases by 10,000 in year Scotsman, Gareth Rose (21/5/10)
What the poverty figures show Guardian (20/5/10)
The untold story of poverty in working households Guardian, Peter Kenway (21/5/10)
UK pledges to reduce poverty Financial Times, Daniel Pimlott (21/5/10)
Don’t scrap child benefits, charities warn Guardian (20/5/10)

Data and reports
Households Below Average Income (HBAI) 1994/95-2008/09 Department for Work and Pensions (19/5/10)
Households Below Average Income (pdf file) National Statistics, First Release (20/5/10)
Effects of taxes and benefits on household income Office for National Statistics (see also, especially Tables 26 and 27)
Poverty and inequality in the UK: 2010 Institute for Fiscal Studies
A range of poverty data The Poverty Site

Previous blog
See also The poverty of poverty reduction policies


  1. What are the main causes of a) poverty and b) inequality?
  2. What is the difference between poverty and inequality? Can you think of any policies that might improve one of these objectives, but worsen the other?
  3. Explain how and why the recessions of the early 1980s, the early 1990s and between 2008 and 2009 could have led to poverty being reduced.
  4. The Financial Times article talks about different levels of poverty across the country. What can explain these regional disparities?
  5. The Coalition government has pledged to lift the income tax threshold to £10,000. What effect could this have on unemployment and poverty? How might this effect the poverty trap?
  6. The Guardian article ‘What the poverty figures show’ says that high levels of child poverty will cost the country at least £25bn a year. Why is this?