poverty trap

Poverty Trap

An obstacle or disincentive for a person to work to raise himself/herself out of poverty. For example, an increase in income from a job may reduce the welfare benefits for which one is eligible. Likewise, a lack of affordable educational opportunities may prevent one from acquiring skills necessary to earn more money.

poverty trap

a situation where an unemployed person receiving SOCIAL SECURITY BENEFITS is not encouraged to seek work because his or her aftertax earnings potential in work is less than the benefits currently obtained by not working. Given that social security benefits represent the ‘bottom line’ (that is, the provision of some socially and politically ‘acceptable’ minimum standard of living), the problem is how to reconcile this with the ‘work ethic’. One suggested way is for government to provide employers with employment subsidies that allow them to pay wages higher than the minimum level of social security, even though the MARGINAL REVENUE PRODUCT ofthe work undertaken does not warrant it. It will thus be to people's economic advantage to obtain employment, and in so doing it is hoped they will acquire work experience and skills that will improve their long-run earnings potential.

Alternatively, the overlap between entitlement to social security benefits (based on one set of income scales) and the threshold level of income at which people start to pay tax (based on a different set of income scales) can be removed by the introduction of a NEGATIVE INCOME TAX. A negative income tax system replaces means-tested social security benefits on the one hand, and PROGRESSIVE TAXES on the other, with a single unitary tax system. Under this unitary tax system, people pay taxes when they are in employment and earning more than a stipulated minimum income and receive a tax rebate to bring their income up to the stipulated minimum level when they are either unemployed or earning less than the minimum. See alsoSUPPLY-SIDE ECONOMICS.