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.