It takes money to make money, and if you don’t have any, well...you’ll be stuck. Stuck in a poverty trap. Systems with high barriers to entry have large poverty traps. Systems with low barriers to entry have lower poverty traps.
Let’s say you’re very poor and trying to figure out how to get on your feet. If you’re in Thailand, you might be able to get some help from family and friends enough to start a little street food cart. You don’t need permits, land, nada...just a little cart attached to your motorbike. And you need to stay in business long enough by making decent food, and you hope you don't get robbed. In the U.S., there exist way more barriers to enter the market as a food vendor: food permits...you probably have to rent or buy space...have a health inspector check you out, etc. It’s a lot harder, and a lot more expensive. But fewer (probably) gunpoint robberies.
If you don’t have enough capital to escape poverty, you’re in a poverty trap. Oftentimes, people aren’t making a high enough income to save up any meaningful amount to climb out of the hole of poverty. Some people might even be living at shelters while working a full-time job, and may or may not be able to get out of the poverty trap that way. You begin relying on government handouts to make ends meat. You stop fighting for a better life. You end up just focusing on how to "work the system," rather than bootstrap your own independence. You have no other choice.
The poverty trap helps to inform programs meant to get people out of poverty. If a little money is thrown at those in poverty via a program, but not enough, then that program isn’t going to have the best results. People need that critical mass of capital, or else they will stay dependent on aid. And when a lot of money is thrown (witness: the projects), an entire generation is created that relies only on government handouts, which have grown so big that replacing those handouts with a market-based, high-paying office job is virtually impossible.
While helping people attain the critical mass of capital is one type of program, other factors like healthcare programs affect the poverty trap, too. Researchers have found that poor health and disease-ridden areas can keep people in the poverty trap. Things like healthcare programs might ease the cost burden of health issues for those in poverty, which could leave them more of their own income to buy climbing gear to, uh...get out of that poverty trap.
Related or Semi-related Video
Econ: What are Real v. Nominal Wages?0 Views
And finance Allah shmoop What are riel versus nominal wages
Well old Grandpa Larry has been retired for a while
so he's a bit out of touch When I was
your age burgers cost a quarter Now they're five dollars
five dollars Everything so expensive nowadays Oh Grandpa and guess
There he goes again being either sarcastic or totally not
getting that Inflation is a you know a thing Well
inflation is the reason prices and wages or nominal wages
to be precise there That's the reason they rise Inflation
Your nominal wage is the actual dollar amount on your
paycheck And on Grandpa you know when he a bad
one for you Maybe it's a three grand a month
for grandpa while it was three grand for the whole
year So grandpas not exactly wrong Everything was in fact
cheaper nominally cheaper back in the day But nominal incomes
were also lower Today the sticker price on everything is
much higher but so are our paychecks Where grandpa is
steered wrong is that well he's only thinking of prices
rising not income if prices rise But buying power also
rises Well then things aren't necessarily Mohr expensive or at
least not relatively more expensive What Grandpa doesn't get is
that he's looking at nominal wage rates when he should
be looking at the real wage rate Well the rial
wage rate is the money you make once you take
into account the effects of inflation on buying power While
your nominal paycheck is much larger than grandpas while you're
really wage rate might be pretty similar to what his
was in the nineteen fifties Riel wage rates allow us
to compare the amount of buying power different people have
or well had And that's what counts right Sure you
can buy a lot of things if you're a millionaire
today But as inflation raises prices for many decades down
the line being a quote millionaire unquote in nominal terms
it might be pretty average inflation which is what creates
the difference between nominal and real wages is the reason
you really really shouldn't save up cash in your sock
drawer under your match Chris was just sitting there doing
nothing You're much better off keeping your money somewhere where
it can at least gain a little interest income ideally
enough to keep up with inflation which is around two
or three percent a year on most years Think about
it this way If Grandpa Larry put a five dollar
bill in his sock drawer in the nineteen fifties that
five dollars was worth twenty burgers at the time right
A quarter a burger If he took out that same
five dollar bill from his sock drawer today he'd only
be able to buy one burger with it Just won
all that inflation over all those years Eroded the burger
buying value of that five dollar bill from twenty burgers
down to a single burger If you want to keep
your buying power up while the money you have lying
around needs to earn a two or three percent interest
a year if your nominal savings keeps up with inflation
while your riel savings will retain its riel buying power
If Grandpa Larry put that five dollars in the bank
accounts that yielded me let's call it two percent Well
then he'd be able to buy a lot more with
it than just one burger today Although he's not totally
wrong about burgers that is getting more expensive If you'd
put that five dollars in a bank account seventy years
ago and it grew a two percent a year well
at five dollars would now be twenty dollars which means
it grew three hundred percent of the price of burgers
though rose from a quarter to five dollars in the
same time which comes out Tio nineteen hundred percent well
While his five dollars was keeping up with inflation it
wasn't growing as fast as the cost of burgers So
the rial price of burgers actually did go up Even
on a relative basis The Consumer Price index helps us
see real price changes like these For instance the real
price of college and health care have risen by a
substantial amount way higher than the rate of inflation That
means it takes more buying power than it did before
to pay for those things which is a bigger cut
out of people's paychecks than ever before So maybe Grandpa
Larry is an entirely senile yet after all but he's
getting there
Up Next
What are Wage Rates? Wage rates are pay scales that are predicated on labor value at an hourly rate. The free market sets the rate based upon suppl...
Who benefits from unions? Trade unions ostensibly exist to protect the interests of their rank and file constituent members. They were crucial for...