In the week where we celebrate our latest cohort of economics graduates we are announcing the top entries in this year’s IAESV blogpost competition. And the winner is (cue the drum-roll), second year undergraduate, Niamh Underhill. Here is the blog post:
Economics describes a group of people in the economy that come from a low-income, low-wealth background – income being money you earn and wealth being money you have stored in assets (a house, for example) – as having a low socio-economic background. The Poverty Trap describes a mechanism where those in poverty (normally from a low socio-economic background) struggle to escape poverty and/or give the means to escape poverty to their children. Each successive generation then suffers the disadvantages of living in poverty.
Poverty, in this case, refers to those living a low-level quality of life. Economics uses one simple factor to measure poverty: household income. Households are considered to be living in poverty if household income is below 60% of the median in that year. This means it’s a measure of comparison between the lowest income households and the rest of the population that year. Factors including unemployment or ‘low-skilled’ employment are likely to be a part of the explanation.
The Poverty Trap is evaluated, by economists, as a result of under-consumption of merit goods due to personal circumstances. This is to say, economists believe that the public don’t use the services that are provided for them (free of charge at point of use) enough, particularly education, which would offer those from lower socio-economic backgrounds the means to escape The Poverty Trap. Classical economists will argue all children have homogenous (the same) opportunities in public education and have equal access to education which can allow for the individual to obtain employment in a higher skilled, higher income job than their parents or older family members.
However, the mechanism does not account for factors that explain the under consumption. This can be anything from taking care of a younger sibling or needed to work to provide for the family to being part of the foster care system or being involved in an abusive cycle from one or more guardians (mentally or physically). External factors in a child’s life often impact their ability to consume these ‘merit goods’ and, therefore, The Poverty Trap ensues.
Relevant, effective policy that increases the ability to consume merit goods can give those affected the means to overcome it. These policies should focus on the role of a child in a vulnerable (financially, emotionally or physically) family/home and how public services can be used to encourage the consumption of education, in particular. Methods can include increased provision of specific financial aid, before/after school activities, continuous mental health counselling and in-depth assessment by social services to ensure all children receive homogenous (or as close to as possible) educations.
Economics explains that any normal good (or service) increases in demand when the price goes down. In theory, this would determine that to increase demand (and therefore consumption) of education, the cost of consumption should be decreased. Education is free, however, at the point of use, except where consumers choose to consume from private education providers (around 7% of school children in the UK). Economics must, therefore, use a different mechanism to increase demand.
Every transaction (or choice) has, what economics refers to as, an ‘opportunity cost’: the value of the next best alternative choice forgone. This mechanism describes that, for every choice an economic agent makes, they have given up another option (the next best alternative). To increase consumption of education, it must be deemed more valuable than the next best alternative.
For example, if a hypothetical 16-year-old’s family is struggling financially and that 16-year-old feels they need to gain employment to provide for the family, they may consume less education or all together stop consumption, sometimes with no qualifications. To encourage consumption, the reward for continuous consumption of education must be greater than the reward for stopping consumption and gaining employment instead; the value of the consumption of the merit good must be greater than the opportunity cost of that consumption.
This is achieved through a common labour market mechanism where those who are generally more qualified are generally better paid because they are believed to be more productive and so can produce more output per hour than someone less qualified.* This concept should be explained to students, particularly, to incentivise continuous consumption with the reward of opportunities for higher paying jobs in the future as a result of their consumption in the present.
Francis-Devine, B., 2020. Poverty In The UK: Statistics. [online] House of Commons Library. Available at: <https://commonslibrary.parliament.uk/research-briefings/sn07096/> [Accessed 15 May 2020].
Isc.co.uk. 2020. Research – ISC. [online] Available at: <https://www.isc.co.uk/research/> [Accessed 21 May 2020].
* although labour market and wage discrimination both occur and threaten this mechanism