Unemployment’s Relationship with Poverty from Rich to Poor Countries

It doesn’t take an economist to notice that there are key fundamental differences between the economies of developed and developing nations.  Obvious key differences tend to be things like strength of currency, inflation, GDP per capita, etc.  However, a new study which David Leonhardt of the New York Times (article can be viewed here) picked up from Gallup shows the differing nature unemployment plays in relation to poverty.

In the developed world, people clearly associate poverty rates with unemployment.  Conventional wisdom follows that as unemployment rises, poverty will also.  Given that the world is mired in a recession in which the number of unemployed workers in developed economies like Japan, Europe, and North America has drastically risen.  Unemployment is an economic and financial concern to millions of families and graduating students as they worry about loss of income and how that will affect their ability to pay bills, provide for themselves, and maintain financial security.

In the US, poverty levels significantly increased initially with the start of the recession in 2008 rising to an astonishing 15.7%.  Surprisingly, it did not increase in 2009 when unemployment numbers rose from the previous level at the beginning of the recession.  The Center on Budget and Policy Priorities has credited targeted government programs which have given assistance to out of work and distressed households for restraining the poverty rate at current levels.  However, the question remains, what relationship does unemployment have with poverty levels?

Gallup’s study has shown that there is no statistical relationship between unemployment and poverty in their survey of data from 129 countries varying from well developed economies to underdeveloped ones.  For some this may be a shock – but there are many theories economists point to in explaining this conclusion.  One explanation which was further studied by Gallup is that there a too many people who are underemployed or not able to find enough work to be above the standards of poverty.  Using the same 129 countries, the studied showed a statistical relationship between underemployment and GDP per capita (a typical measurement of poverty).  The data showed that as underemployment rose, GDP per capita fell typically meaning that there was an increase in poverty.  Studying the relationship further, when analyzing full time employment for an employer with GDP per capita, the relationship was even stronger.  As full time employment numbers for a country rose, so did GDP per capita.

There are some things that must be referenced to put these findings in proper contexts.  Labor markets, which define employment, vary greatly by countries because of the structural makeup of the country’s economy.  Take for instance, parts of sub-Saharan Africa rely predominantly on subsistence living and not by income earned through labor markets and employment.  So in a general sense, while the people do not have income earning jobs, they are working and engaging in economic activity.  (It is important to note that many of these people are still living in relative and extreme poverty).  Also, in many developing countries, as a result of subsistence farming/agriculture, unemployment is only a major factor in the cities and major urban centers.  In some cities, the government published unemployment rate doesn’t reflect the true picture.  Many people in urban centers are considered “unemployed” but earn income from activities such as street peddling and other activities associated with the underground economy.

Looking at the map of countries surveyed, the United States had higher unemployment and than poor countries like Chad, Uganda, Niger, Turkmenistan, and Sri Lanka who have much higher poverty rates.  So there is a major question in which policymakers, development professionals, and economists concerned with poverty must answer – how can we in the future prescribe remedies to reduce poverty based on the findings of this research on the relationship between employment/underemployment/unemployment and poverty (GDP per capita)?