poverty trap

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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.
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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.

Collins Dictionary of Economics, 4th ed. © C. Pass, B. Lowes, L. Davies 2005
References in periodicals archive ?
Health shocks, agriculture shocks due to excess or lack of rain or any other crises push the poor back into poverty trap and they are unable to tackle these risks well in time.
By contrast, our model explains risk taking as a constrained optimal choice for those poor who are near the asset threshold but otherwise blocked by credit constraints from accumulating the capital necessary to escape the poverty trap. The literature has thus far overlooked the intuitive point that thresholds associated with nonconvexities that generate poverty traps might induce risk taking among a specific subpopulation--the poor who are subjacent to the threshold--for whom gambles may provide a mechanism for (probabilistic) wealth accumulation when credit- or savings-based investment is infeasible.
Once they fall into a poverty trap, people stay poor for generations.
A huge push with key investments in people and infrastructure will provide the tools necessary to break out of the poverty trap and start on the path of sustainable development.
And this lack of long-term investment suppresses economic growth, perpetuating the "poverty trap." Population growth continues to accelerate in these impoverished nations because children are viewed as insurance against high mortality rates, but this causes further economic strain on poor countries.
Being employed is more helpful in escaping the poverty trap in some countries than others: in the UK, Denmark, Belgium, Ireland and Germany, it reduces the risk by two thirds; in the Netherlands and Luxembourg, only "slightly".
If not, the report notes, "millions of people will never escape the poverty trap, as with each new [disaster], precious gains being made in poverty eradication are being swept away."
Not only is this unnecessary 'churning'--with people paying tax only to have it paid back in welfare--it also creates the 'poverty trap' of prohibitively high effective marginal tax rates.
Therefore, the recipients would remain in social assistance voluntarily ("poverty trap").
Equity and health sector reforms: can low income countries escape the medical poverty trap? Lancet 2001;358:833-36.

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