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Thursday, 1 December 2011

Equality through employment

Andres Velasco argues that the best way to tack rising inequality is through job creation. Focusing on evidence Chile, he argues that if poor households had the same access to jobs as the middle classes enjoy, the gap between rich and poor would narrow by half.

“Do you feel it trickle down?” ask the protesters occupying Wall Street and parts of financial districts from London to San Francisco. They are not alone in their anxiety. Income inequality is a top concern not only in tent cities across the United States, but also among street protesters in Taipei, Tel Aviv, Cairo, Athens, Madrid, Santiago, and elsewhere.

Inequality almost everywhere, including China, has become so extreme that it must be reduced. Protesters, experts, and center-left politicians agree on this – and on little else. The debate about inequality’s causes is complex and often messy; the debate about how to address it is messier still.

In the rich countries of the global north, the widening gap between rich and poor results from technological change, globalization, and the misdeeds of investment bankers. In the not-so-rich countries of the south, much inequality is the consequence of a more old-fashioned problem: lack of employment opportunities for the poor.

In a forthcoming book, University of Chile economist Cristóbal Huneeus and I examine the roots of inequality in Chile and elsewhere in Latin America and come away with three policy prescriptions: jobs, jobs, jobs. In the last quarter-century, Chile managed to consolidate democracy, triple per capita income, and achieve the highest living standards in Latin America, with near-universal coverage in health care, education, and old-age pensions. Yet the gap in the labor incomes of rich and poor has barely budged.

In Chile and elsewhere, discussions of inequality tend to focus on how much people earn. According to national household surveys, a Chilean worker earning the minimum wage takes home $300 a month, while a professional in the top 10% of the income scale typically makes about $2,400 dollars a month. But that eight-fold gap is only the tip of the inequality iceberg.

It also turns out that the poor worker lives in a household where only 0.5 people on average have a job, so that two families are needed for one steady source of income. By contrast, in the upscale professional’s household, nearly two people on average hold down a job.

Add to this several other differences – above all, poorer families’ higher fertility rates – and the sums reveal that the top 10% of households actually make 78 times more (on a per capita basis) than those at the bottom. That is the kind of figure that keeps Chile ranked high globally in terms of inequality, despite the country’s other achievements.

Put differently: not only take-home pay, but also employment opportunities can be unequally distributed. Compound the two problems and you have world-class income disparities. Chile is hardly alone in this category. South Africa, another country that is proud of its exemplary transition to democracy, suffers from the same problem in an even more extreme version. And, within Latin America, Colombia and Brazil, among others, face a similar combination of low employment and high inequality.

The main victims of this state of affairs are women and the young, for whom employment ratios are much lower than for the population as a whole. A typical poor household in Chile and elsewhere in Latin America is headed by a woman with only primary-school education. She has small children, limited access to day care, and few job opportunities.

That is the bad news – and it is very bad news indeed. The good news is that reducing inequality by creating jobs for the poor may prove to be faster than altering the entire structure of wages. Over the medium term, wages depend on productivity, which in turn depends crucially on higher-quality education and training for the poor, which Latin American countries certainly need. Indeed, a heated national debate about how to improve education has seized Chile for much of the past year.

But educational reforms, however urgent and important, take a long time to bear fruit, whereas changes in employment can reduce inequality more quickly – and the effects can be large. In our book, we estimate that if poor households in Chile had the same access to jobs as the middle classes enjoy, the gap between rich and poor would narrow by half.

So, what is the best way to create job opportunities for the poor? A growing economy with low inflation and financial stability is a necessary but insufficient condition. Labor rules that favor job creation – what Scandinavian countries call active labor-market policies – are needed: a combination of information, training, and subsidies that help overcome what are typically serious failures in the market for young workers with limited skills and experience.

The problem is more political than economic. In most Latin American countries, big business and labor have a long history of mutual distrust, and getting them to agree on changes to labor-market rules is hardly an easy task. Moreover, many unemployed young people are not registered to vote, so providing jobs for them is hardly a top priority for the political establishment.

Equality through employment – not the snazziest of slogans, but one well worth painting on banners and flying over occupied squares and parks, on Wall Street and much farther afield.

1 comment:

  1. The single most common reaction from political conservatives worldwide to the protesters in Occupy camps is to tell them (or more often scream at them), "Get a job!" This is especially ironic if one takes half a moment to understand what it is that all these people in all these different countries are actually protesting against: lack of employment opportunities with sufficient wages to support a middle class lifestyle. One of the things in common among many from Egypt to Paris to New York to Sydney to Taipei is that having obtained the higher education degrees which the system has always promised will lead to more opportunity and economic reward have failed to materialize. Education is inherently valuable to the individual in many ways outside of the workplace, however it can no longer be said to present a clear path to prosperity in an economic system increasingly tilted towards the manipulations of financiers and "hedged" capital investors. Contrary to the dogma preached by conservatives, "hard work" is increasingly less a determining factor in who is rich or poor than is whether or not one was born to richer parents or poorer ones.

    The more I study these issues, the less impressed I become by analyses of relative poverty that imply that families have more or fewer children because the are poorer or richer. I am increasingly convinced that families are poorer or richer because they have more or fewer children, earlier or later in life. For example there is apparently huge resistance to viewing the growing prosperity of Chinese citizens relative to their counterparts in India as a direct result of the (admittedly draconian) one-child-per-family laws. However the math is really very simple, it takes two adults to make a child, and having only one essentially concentrates both the inherited resources of two familial lines as well as the output of both adults into a single child. With increasing numbers of children that same wealth and income must be diluted to an ever increasing degree. This is not mitigated by harnessing the output of older children to contribute to younger ones, rather that simply has the effect of reducing the amount of accumulated wealth the older child has when it comes time for them to have children of their own.

    Time is also a factor, and a mother aged 30 has had vastly more opportunity to accumulate resources than one aged 20, while one aged 15 has to cut their own childhood short in order to take on adult responsibilities. The concentration on fertility rates (live births per woman) is misleading and inaccurate as a predictor of overall population growth as well. If MotherA has 4 children starting when she is age 30, and MotherB has 2 children when she is age 15 and 17, one of which is female and repeats the same fertility pattern, then the lower fertility MotherB will have actually added more people to the population per year than the higher fertility MotherA. Women who wait longer to have children also have more opportunity to gain education, job skills, and savings.

    Zambia is not overpopulated (yet), but it does have too many young mothers, and too many children being born into poverty as a result. Empowering women with reproductive choices like contraception as well as education in math and family planning will vastly reduce overall poverty rates over time. Slowing the rate at which new job seekers enter the workforce will also improve the ability of individual workers to bargain for better wages. If GDP and other measures of economic output and population grow at roughly the same rates then there will be no economic growth at the per capita level. Older mothers is the route to lasting prosperity.


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