According to World Bank Statistics, 736 million people lived in extreme poverty in 2015. This is 1 billion lower than in 1990 (15 years earlier). Following the COVID-19 outbreak in 2020, the number of poor people is expected to be significantly higher than in 2015, as the pandemic seems to be reversing a rather good trend. 

Statistics about poverty

  • Half of the world poor live in only 5 countries, namely India, Nigeria, Democratic Republic of Congo, Ethiopia, and Bangladesh. The other half are dispersed in various countries around in the world, mostly in Asia, Africa, Eastern Europe and South America.

The opportunity cost of poverty

Poverty deprives people from access to essential services. When people do not have access to critical services to meet their basic needs, so much human potential is lost. Many of those people could be entrepreneurs making innovative products, scientists who are working on solutions for persistent health problems, passionate educators who could lift an entire generation our of illiteracy, good leaders who could instill values of justice, freedom, and peace in their countries, and many others. In short, solving the poverty problem solves so many other problems.

The link between poverty and market inefficiency

People’s economic wellbeing is highly dependent on the occurrence of exchange. If people sell products and services, they receive resources in exchange for the value they are offering, and they can use those resource to acquire value for themselves. In turn, economic wellbeing influences all other aspects of wellbeing. For transactions and exchange to happen smoothly, markets need to be efficient enough. Otherwise, stagnation takes place and economic troubles follow.

The first market that comes to mind here is the labor market, as it is where jobs can be found and enables people to earn an income. However, in the case of the labor market, its efficiency relies significantly on the efficiency levels of other market. Before delving in depth in what that means, we have to define market efficiency and understand what it really means.

Market efficiency

For a market to be efficient, it has to have the following features:

  • There exists buyers and sellers at various price levels (liquidity)
  • Buyers and sellers can find one another at low costs (i.e. low matchmaking costs in terms of time and money).

In essence, efficient markets benefit both suppliers and requesters (buyers and sellers). If a certain market serves, for example, sellers more than buyers (such as in monopoly markets), then we can say that the market is inefficient. It follows from this that having more buyers and more sellers in a balanced way is a sign of high market efficiency.

If applied to the labor market, this would mean that workers can easily find jobs that demand their skills, and companies can easily fill their vacancies and with low hiring costs. The efficiency of the labor market thus depends on two key factors:

  1. The capacity of the educational system: the educational system should be able to supply individuals with the needed knowledge and skills and prepare them for the job market well. The educational system should ensure that the skills it is teaching are on demand. Otherwise, it won’t be contributing to the efficiency of the labor market.
  2. The success of the companies hiring, which in turn depends on the demand for their products and services.  If there is a high demand for products and services, the company will need to increase its capacity, which can entail hiring more people. In other words, the efficiency of the labor market depends in part on the efficiency of other markets.