This paper studies the effect of the business cycle on poverty, drawing evidence from the United States, Great Britain, Sweden and Australia. Many of the poor in those countries are outside the labour market and for those inside, transfers are a large part of income. But unemployment and wage reduction in recession still increase poverty. Major causes of poverty are unemployment in Great Britain and Australia and low wages in the United States. Similar relations are observed in Sweden but a vast transfer program has virtually eliminated poverty. This paper concludes with an examination of the policy options for combating the poverty caused by recession. A combination of unemployment insurance for a limited period followed by a job guarantee is the most effective policy towards unemployment. Poverty caused by low earnings can be dealt with by redistribution through the tax system.

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November 1990     Paper Number CEPDP0013