Transition Events in the Dynamics of Poverty. II.1. Theories Used to Explain Poverty


What theory is appropriate for analyzing poverty dynamics? Sawhill (1988) concludes in her survey of the poverty persistence literature that the literature lacks “a widely accepted theory of income distribution that might help one choose between competing model specifications and their varying results” (p. 1112). She finds that “few researchers have approached the task of analyzing the effects of different variables on the poverty rate in the context of a coherent overall model of the process by which income is generated” and that “we are swamped with facts about people’s incomes and about the number and composition of people who inhabit the lower tail, but we don’t know very much about the process that generates these results” (p. 1085).

This review of the literature indicates this is still the case. The literature provides many poverty statistics and some empirical results, but little theory to explain them.(4) Perhaps this is because a theory of poverty is complex to model. As Duncan (1984) notes, a complete explanation of why people are poor would require many interrelated theories—theories of family composition, earnings, asset accumulation, and transfer programs, to name a few.(5) Further complicating the task, a complete poverty theory would need to be based upon the family, while most theories are based upon individuals (Duncan, p. 46). If there is not a complete theory of poverty, are there theories that can be used to explain some aspects of poverty?

Most theories used to explain poverty focus on able-bodied, non-elderly adults, whose potential for escaping poverty rests on their ability to work enough hours at a sufficiently high wage rate. Many theories of poverty, as a result, become theories of labor supply and wage rates (Duncan 1984, p. 46). Human capital theory is one example. Among other strengths, human capital theory has much empirical support and so is the primary focus of this review. This review presents a brief description of human capital theory and other relevant theories, including the permanent income hypothesis, culture of poverty theory, and dual labor market theory.

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