# What causes poverty?

1. Jul 29, 2006

### ShawnD

On another forum, there was an argument about raising minimum wage. Some people were saying it is a good idea because it puts more money in the pockets of the lowest income people (this is true). Some said it was potentially bad because it would force layoffs since it would dramatically increase the labour cost to run a business (this is also true). A small group of people argued something that really struck me as interesting. They claimed that raising minimum wage would increase the amount of money the lower class has, which would increase their demand on goods, which would cause inflation, which leaves those lower class people in the exact same position of poverty they started in. If you think about it, this absolutely makes sense. If people have more money, it lowers the value of that money, which means you need more money, and the cycle goes on. For example, a Mexican may earn $1 per hour in Mexico, but he can buy food for$1. An American will earn $5 per hour, but his food costs$5. The American earns 5x as much as the Mexican, but he is not any wealthier.

This being said, how do we fight poverty? If we throw money at poor people, it will cause inflation. Not only does that not help poor people, but it hurts middle and upper class people because their savings are worth less and less with each passing day, unless they have it invested properly.

2. Jul 29, 2006

### Mickey

This could really go in the economics/social sciences section.

Microeconomics predicts that the supply and demand for a good, labor in this case, will naturally approach an equilibrium price (wage) and quantity supplied (amount of labor hours purchased). If the minimum wage law is set to a price that is below the equilibrium price, it doesn't matter, because everyone is getting paid that higher equilibrium price. However, if the minimum wage law is set above the equilibrium price, then there are already problems, because the market is losing efficiency by not being able to approach the equilibrium... businesses buy less labor and there is not enough work for people who want to work. Raising the law even higher should make these problems worse.

But, personally, I think microtheory is so far removed from the real world, it's ridiculous. Hundreds of thousands of people, maybe even millions, are paid below minimum wage in tip jobs. Microtheory can't handle gratuities, because the good supplied is some very ambiguous notion of quality of service, and tips can vary based on how rich one is.

Minimum wage jobs also tend to be those that have labor unions who are already working on higher wages. If the unions can't get the wage increases, the company can hire other people who will work for less. It may not sound pretty, but working for less is their competitive advantage, and those people have a right to compete. And if people don't like that, well, they can start their own businesses and purchase labor at a higher price. I'm sure they'll get a lot of applications.

At the macroeconomic level, where inflation is studied, things are different, which is what you were getting at. There are many forces pushing on inflation, so any one force generally does not cause a problem. It's when many forces affect inflation that widespread economic trouble ensues. The Fed watches out for this and messes with the price of money to counteract. The minimum wage is not high enough to be a problem, IMO, which is why Republicans are capitulating.

So go ahead and raise the minimum wage. People should not be working in those jobs anyway. Wage jobs are for teenagers and robots. If people lose those jobs and the economy slows down, good, it's the sign of a dying business model and the rise of a new one. Maybe the stakeholders will invest in more profitable ventures, get more education, or even start their own businesses. Or businesses plural. Get a blog and sign up for GoogleAdsense and sell your old junk on eBay while you're at it.

Last edited: Jul 29, 2006
3. Jul 29, 2006

### Staff: Mentor

Well, some of those people because:
Yes, that's true.
That is not true because of what you already stated above. If wages and unemployment go up, the total amount of money available to the lowest of the low remains roughly unchanged. And like you said - any possible actual increase will result in inflation. The net result could actually be that raising the minimum wage could lower inflation adjusted incomes.

(that's actually a relatively minor nitpick - either way, you get to about the same place).
Simple answer: you motivate the poor to better themselves by not paying them to remain poor. Bill Clinton did one good thing during his term (imo) and that was welfare reform. And most democrats hated him for it. But it was a near unqualified success because it motivated people to better themselves, which is the only real way to make change (from within). http://www.usatoday.com/news/nation/2006-07-17-welfare-reform-cover_x.htm
The effects of forcing people to find their own way are undeniable:
Even with the cyclical losses, the numbers are absolutely staggering: a 15% drop in child poverty in 12 years? A 50% rise in income for the lowest 40% of unmarried women? Rediculous! Awe inspiring.

More (its a great article, and only a week old):
The case examples are interesting too - by in large, the people the tracked since 1994 have a positive opinion of the change. They recognize that while it was tougher for them in the beginning, they are better off in the end - and the country is better off with them working instead of getting paid not to work. And they recognize it and feel a sense of accomplishment. They are in a separate article: http://www.usatoday.com/news/nation/2006-07-17-welfare-three-families_x.htm
Frankly, I'll never understand why Clinton did this, but it is almost enough, on its own, to make him a decent President. If history forgets all the negatives and remembers only this, I actually won't mind.

And ironically, this probably makes Clinton responsible for the marginalization of the Democratic party since his term.

Last edited: Jul 29, 2006
4. Jul 29, 2006

### Gokul43201

Staff Emeritus
I wish macroeconomics were this easy. Your reasoning above hardly justifies the use of the words "exact same".

5. Jul 29, 2006

### Ivan Seeking

Staff Emeritus
None of this takes in to account greed.

When I give an employee [contracted student] a raise, it means that I make less. I make less, so I spend less on personal purchases. The student spends more, and the net effect on inflation is zero.

Or course, whereas my money may go towards a Mig ride, the student is probably buying food.

6. Jul 29, 2006

### Ivan Seeking

Staff Emeritus
Also, here is a simple fact about supply and demand wrt the labor force.

There are many, many small towns in the US - perhaps thousands - that are primarily sustained by one large factory or business. The people who live in these towns have roots, family, and a way of life. They are also too poor to move.

The factories often work these folks like slaves for chicken wages. Every time that I go to one of these places, and I have seen many, I thank God that I'm not in their employee's shoes. Then you see the boss pull up in his Ferrari...

7. Jul 29, 2006

### Gokul43201

Staff Emeritus
Unless your earnings far exceed your spending, in which case, there is a much weaker correlation to spending.

8. Jul 29, 2006

### Ivan Seeking

Staff Emeritus
That would only apply in cases of extreme wealth. You have to be pretty rich before you run out of ways to spend money.

What percentage of workers are employed by small to medium sized businesses?

9. Jul 29, 2006

### Gokul43201

Staff Emeritus
Agreed. Was just being pedantic.

10. Jul 29, 2006

### Cyrus

Microeconomics, Dr. Yunus.

The solution to poverty, IMO.