IB Economics HLTopic 3 — Inequality and PovertyPaper 1 & 2Policy~10 min read
Other Policies That Reduce Inequality
Tax is only half the story. Governments also hand money directly to households, set a legal wage floor, and pay for the schools and clinics that decide what people can earn later. Each policy breaks the poverty cycle at a different point, and each one has a catch.
📚 What you need to know
Transfer payments move money to the poorest without anything being produced in exchange — unemployment, disability, pension and child payments.
A national minimum wage is a legal wage floor set above the market wage.
Universal basic income pays every citizen a guaranteed amount, whatever their situation.
Targeted spending on education, healthcare and infrastructure raises human capital and future earning power.
Anti-discrimination policy widens access to jobs, so talent is not wasted.
Every one of these works by shifting the Lorenz curve inwards, and every one costs money or creates a side effect.
Two different ways to help
It helps to sort every policy into one of two boxes before you write about it.
Raise the floor now
Transfer payments
Minimum wage
Universal basic income
Effect: incomes rise this year. Fast, but it does not change what people can earn on their own.
Raise earning power later
Free or subsidised education and training
Healthcare access
Infrastructure and anti-discrimination law
Effect: nothing changes this year, but the poverty cycle is genuinely broken.
A very good essay says a country needs both. The first group stops people drowning today; the second teaches them to swim. Judging a policy against the wrong goal is the most common reason evaluation marks are lost here.
The policies, one by one
Policy
How it works
The catch
Transfer payments
Cash to the poorest and most vulnerable: unemployment and disability payments, pensions, child support, heating and transport subsidies.
Expensive, and if payments are close to low wages they can weaken the incentive to take a job.
National minimum wage
A legal floor above the market wage. Firms cannot pay less, so the lowest-paid workers keep more.
If set too high above equilibrium, firms hire fewer workers, so some of the people it was meant to help lose their jobs.
Universal basic income
Every citizen receives a guaranteed payment. Nobody falls through gaps, and there is no stigma in claiming.
Very costly because it goes to everyone, including people who do not need it. Usually needs higher taxes to fund.
Free or subsidised education
Raises skills and human capital, so future wages are higher and productivity rises.
Long time lag — a decade or more before it shows up in incomes.
Healthcare access
Healthy workers miss fewer days, work longer lives and are more productive.
Ongoing annual cost, and outcomes depend on quality, not just spending.
Infrastructure and services
Roads, buses, clean water and electricity let poorer households reach jobs and schools at all.
Large upfront capital cost and possible environmental damage.
Anti-discrimination law
Opens jobs and pay to groups previously shut out, reducing inequality of opportunity.
Hard to enforce; attitudes change more slowly than laws.
What success looks like on a diagram
Whichever policy is used, if it works then the poorest groups end up with a bigger share of national income. On a Lorenz curve that means the curve moves inwards, towards the line of perfect equality, and the Gini coefficient falls.
Both curves still start at the origin and finish at the top-right corner. Only the sag changes — and that sag is the whole measurement.
How to judge a policy in an essay
🧩 Five questions that generate evaluation
Who actually receives it? Universal payments reach everyone but waste money on people who do not need it. Targeted payments are cheaper but people fall through the gaps.
What does it cost, and who pays? Higher spending means higher taxes, more borrowing, or cuts somewhere else.
What does it do to incentives? Does it still pay to take the job, train, or hire the extra worker?
How long until it works? Cash arrives next month. Better schooling arrives in fifteen years.
Will it survive? Long projects often get cut when the government changes.
The equity-efficiency trade-off. Most redistribution takes something from the incentive side to give to the fairness side. Naming that trade-off explicitly, and then saying which side you think matters more here and why, is exactly what a top-band evaluation looks like.
A quick comparison
Transfers
Minimum wage
Education spending
Speed
Fast — weeks
Fast — one pay cycle
Very slow — a decade
Cost to government
High and ongoing
None directly — firms pay
High and ongoing
Main risk
Weakens work incentives
Unemployment if set too high
Money spent, quality not improved
Breaks the poverty cycle?
No, it relieves it
Partly
Yes, this is the real fix
💡 Exam tips
Name a specific policy, not “the government should help the poor”. Marks follow precision.
Draw the Lorenz curve shifting inwards if the question is about the effect of redistribution.
Always give the cost of the policy as well as the benefit — that is half the evaluation.
Distinguish short-run relief from long-run cure; examiners reward that split.
Say which country type you are talking about. Universal basic income is a very different proposition in a low-income economy.
Use the poverty cycle diagram from the previous page to show exactly where your policy cuts in.
⚠ Common mix-ups
Transfer payments are not part of aggregate demand. No good or service is produced — income is just moved. It only affects AD once the household spends it.
A minimum wage is set above equilibrium. Below equilibrium it would do nothing at all.
Confusing universal with targeted. Universal goes to everyone; targeted goes only to those who qualify.
Saying education “reduces poverty” with no mechanism. Spell out: skills → productivity → wages.
Ignoring the funding. Every policy here has to be paid for by someone.
Treating unemployment from a minimum wage as certain. It depends on how far above equilibrium it is set and how elastic labour demand is.
Up next: How Monetary Policy Works — we leave the distribution of income and move to the central bank, interest rates, and the demand-side tools used to steer the whole economy.
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