Econometric Analysis Of Poverty

Before looking at empirical data to explain the variation in poverty levels across states, it is first important to understand the economic and sociologic theories behind poverty and its causes.

Economically, there is no strict definition of poverty. Economists use two basic approaches in order to define exactly what they mean by the term ‘poverty.’ The first is the absolute approach, which deems some particular amount of goods and services as essential to an individual’s or a family’s welfare. This ‘set’ of goods might include a set amount of food, shelter, and other bare-bone essentials. Those who do not possess the resources to obtain this set amount of goods and services are considered poor. The second approach is called the relative approach, which states that a person is poor when his or her income is significantly lower than the average income (Kimenyi 26-30). For the purposes of this study, a relative approach will be used for the reason that it is difficult to measure and compare poverty rates using the absolute approach. In addition, data for the relative approach is more readily available and most frequently used.

Important issues in this model are the causes of poverty, as they may assist in finding the reasons for variation across the country. Economic theory cites several ‘causes’ of poverty, or factors that the poor have in common. The first of these factors is age. The elderly tend to be much poorer than young people. Elderly are more often poorer than younger people because in many cases, they have no other income other than social security, have poor health, and live isolated lives. It would then make sense to say that states with a higher percentage of elderly people would also have a higher rate of poverty (Iceland 2003, 76).

Location relative to employment opportunities and economic growth also is a factor when considering poverty rates. Areas where there is slow economic growth or little employment opportunity, such as rural areas like the Appalachia, tend to have high concentrations of poverty stricken people. Rural areas simply do not offer the same opportunities that urban areas do. In rural areas, there is not often public transportation that people can access in order to travel to places of employment. For example, the South, which is mainly rural, contains nearly one half of all poverty stricken people, even though less than one-third of the population lives there. Certainly the percentage of people living on rural land in a state would have an affect on the poverty rate of that state (Iceland 2003, 76).

Education levels also have a huge influence on the poverty rate. Many studies have shown that higher education levels convert into higher income levels. In today’s society and working world, the demand for workers with high levels of education is increasing