Poverty traps are situations where an impoverished individual finds it difficult to escape poverty due to factors outside of their control. The discussion of this phenomenon is usually focussed on the entrenched poverty in developing countries. One would not think Australia, a prosperous and developed country, could have issues that entrench poverty and prevent people participating in the work force. However, there are a variety of factors present in Australia that contribute to poverty; where you live, the composition of your family, the structure of social welfare and the taxation system are examples of contributing factors.
Where you live
Whilst Australia has a relatively low unemployment rate (5.4% in December 2012), its poverty is incredibly concentrated. For example, in Queensland, 25 of the state’s 459 Statistical Local Areas appear between six and eleven times in the top 20 indicators of disadvantage. In New South Wales, 12.5% of the top 40 rankings of indicators of disadvantage are made up of 1.7% of postcodes. Nationally, 1.7% of postcodes account for more than seven times their share of indicators of disadvantage. This has led to local societies of low social cohesion and higher crime rates. In turn, this leads to entrenched poverty, as this environment is not suitable for dealing with the various family, psychological and other issues that can cause poverty.
Being a sole parent in itself is a potential poverty trap. Not only does there still appear to be discrimination against sole parents when applying for jobs, it can also be difficult for them to find a suitable job, as they often require flexible hours to take care of their children. Particularly as childcare, unless provided gratis by family or friends, is rarely an option given their financial situation. This combined with the extra time needed to take care of children whilst looking for a job, severely decreases their chances of finding suitable employment.
But we have welfare systems, right?
Whilst it is true that support is provided to the unemployed to help them find a job and escape poverty, it has become woefully inadequate. It has been estimated that the Newstart Allowance (the primary payment provided to support people looking for work) could not even pay for a typical one-bedroom unit in Sydney. It has also been calculated that you would be left with as little as $17 after rent has been paid. This makes job seeking incredibly difficult, because not only would it require incredible accounting skills to keep within budget, but searching for a job is expensive. The cost of job searching factors in: transport, internet, clothing and other expenditures. Therefore, it could be argued that the Newstart fails to provide an adequate salary to help people find a job. In fact, there are few groups that disagree with this conclusion. Even the Business Council of Australia has suggested an increase for reasons of adequacy and equality.
A Perverse Disincentive
The final issue is that of the taxation system. Currently, increases in gross income at lower salary levels results in only marginal increase in disposable income, this discourages the pursuit of work. A report by the Australia institute determined that the taxation of welfare payments and other factors, such as when welfare is reduced, have led to a spike in the marginal tax rates paid by relatively low income families (between $30,000 and $40,000). This is a trend that is not repeated until income levels of over $100,000 (where taxes like the Medicare Levy kick in). This means that people just escaping poverty and re-entering the workforce are targeted by the tax system. Whilst people may not directly realise this as the cause, they would notice they are getting little benefit for their work, discouraging job seeking.
Just because Australia is a well-off and generally egalitarian nation, does not mean it is free of the issues that can entrench poverty. Whilst movements against these issues such as discrimination legislation and the substantial increase in the tax free threshold do help some of these issues, a boost in welfare, coupled with targeted relief for impoverished areas is needed to ensure Australia remains as equal as it is, and that poverty traps do not become more numerous or frequent.
David Leggett is an undergraduate student at Bond University.
Australian Bureau of Statistics. (2013). Labour force, Australia, Jan 2013. ( No. 6202.0). Canberra: Australian Bureau of Statistics.
Australian Taxation Office. (2012). Household assistance package – tax reforms. Retrieved February 11, 2013, from http://www.ato.gov.au/individuals/PrintFriendly.aspx?ms=individuals&doc=/content/00309813.htm
Cox, E. (2013, January 17). What the government wants to ignore about sole parents and jobseeking. The Conversation
Martin, P. (2012, April 17). Newstart benefit fails even to pay the rent. The Sydney Morning Herald
Whiteford, P. (2012, April 20). Paltry newstart allowance is fast becoming a poverty trap. The Conversation