What is the difference between absolute and relative poverty in economics?

Absolute poverty refers to a fixed income threshold below which individuals cannot afford basic necessities such as food, shelter, and clothing. The World Bank sets this at $2.15 per day in purchasing power parity terms. Relative poverty, by contrast, is defined relative to the living standards of a society — in the UK, it is typically measured as household income below 60% of median income. The key distinction is that absolute poverty is static, whilst relative poverty rises alongside improvements in average living standards.

In practice, a country can reduce absolute poverty whilst simultaneously increasing relative poverty. If economic growth raises median incomes significantly but leaves the lowest earners behind, those earners may now afford basic necessities yet still fall further below the median income threshold. This is the cause-and-effect tension policymakers must navigate — growth alone does not automatically reduce inequality or relative poverty. Redistribution mechanisms such as progressive taxation and welfare transfers are typically required to address relative poverty specifically.

In the UK, the introduction of the National Living Wage in April 2016 illustrates this distinction clearly. Raising the statutory minimum wage for workers aged 25 and over helped lift some households above the absolute poverty line. However, the Resolution Foundation noted that relative poverty rates remained stubbornly persistent because median wages also rose, keeping the relative threshold elevated. This demonstrates that wage floors can reduce absolute poverty without necessarily closing the relative poverty gap.

A key limitation is that relative poverty measures are sensitive to the choice of threshold. Using 50% rather than 60% of median income produces significantly different poverty rates, making cross-country comparisons unreliable. Furthermore, relative poverty measures can theoretically fall during a recession — if median income drops sharply, the threshold falls too, and fewer households are counted as relatively poor even though material living standards have declined. This paradox reveals that relative poverty is a measure of inequality as much as deprivation.

1. →

   (4 marks) Define absolute poverty and explain one way it differs from relative poverty.

2. →

   (8 marks) Explain two reasons why economic growth may reduce absolute poverty but fail to reduce relative poverty.

3. →

   (12 marks) Analyse the likely effects of increasing the National Living Wage on both absolute and relative poverty in the UK.

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   (25 marks) "Reducing relative poverty is a more appropriate policy goal for the UK government than reducing absolute poverty." Evaluate this statement.

Past-Paper Style Question: Evaluate the view that government intervention is more effective than free market mechanisms in reducing inequality and relative poverty in the UK economy.

Model answer outline:

• →Definition: Define relative poverty as income below 60% of median household income; define inequality as the unequal distribution of income or wealth across a population, often measured using the Gini coefficient.
• →Analysis: Explain how progressive income tax and means-tested benefits redistribute income downwards, shifting the Lorenz curve towards the line of equality; analyse how the National Living Wage raises the income floor, directly reducing absolute poverty; consider how supply-side policies such as investment in education improve human capital and long-run earning potential for lower-income groups; reference the Gini coefficient — the UK's stood at approximately 0.35 in 2023, suggesting persistent inequality despite intervention.
• →Evaluation: Consider that high marginal tax rates may create disincentives to work, potentially reducing economic efficiency and the tax base available for redistribution; note that relative poverty may persist even with intervention if median incomes rise faster than those at the bottom; acknowledge that market-based growth can raise absolute living standards broadly, though without redistribution this need not reduce relative poverty.

Poverty and inequality links directly to the distribution of income and wealth, where the Lorenz curve and Gini coefficient provide the quantitative framework for measuring how unequally resources are spread across a population. It also connects strongly to government intervention and market failure, since poverty is frequently cited as a justification for progressive taxation, welfare transfers, and minimum wage legislation.

• →Always distinguish clearly between absolute and relative poverty in your opening definition — writing "poverty" generically without specifying the type will lose the definition mark.
• →Avoid stating that economic growth automatically reduces relative poverty; examiners specifically reward candidates who recognise that growth can widen the relative poverty gap if gains are unevenly distributed.
• →Include the Gini coefficient as a measure when discussing inequality in extended answers — examiners reward use of precise quantitative measures rather than vague references to "the gap between rich and poor."
• →Show chain-of-reasoning when evaluating policies: for example, a minimum wage rise → higher income for low earners → reduced absolute poverty → but median income also rises → relative poverty threshold rises → relative poverty unchanged.
• →Define the 60% of median income threshold explicitly when writing about relative poverty in a UK context, as this signals awareness of the specific measurement convention used by the Department for Work and Pensions.

Absolute poverty: A condition in which household income falls below a fixed threshold required to meet basic necessities such as food, shelter, and clothing, regardless of wider societal living standards.

Relative poverty: A condition in which household income falls below 60% of the national median income, meaning living standards are significantly below those typical in that society.

Gini coefficient: A measure of income inequality ranging from 0 (perfect equality) to 1 (perfect inequality), used to quantify the gap between the Lorenz curve and the line of perfect equality.

Lorenz curve: A graphical representation of the cumulative distribution of income across a population, used alongside the Gini coefficient to illustrate the degree of income inequality.

National Living Wage: The statutory minimum hourly wage rate set by the UK government for workers aged 21 and over, increased annually as a policy tool to raise the income floor.

Means-tested benefits: Welfare payments made only to individuals or households whose income or assets fall below a specified threshold, targeting support at those in greatest financial need.