Unequal incomes

Jobs of all kinds are created as an economy grows . Therefore the incomes of the poor will rise in the wake of growth, all else being equal. What happens to inequality is another matter.

Assume there are three categories of labor in an economy: skilled, semiskilled, and unskilled and correspondingly three social classes: middle class, working class, and the poor. Further assume that the semiskilled/working class families earn incomes just below the poverty level and that the unskilled/poor families earn incomes that are half the poverty level. Any growth at all will pull working class/semiskilled families out of poverty almost immediately. As the number of hours they work increases they will earn more than the poverty level of real income. At the same time, even with economic growth of 5% per year, poverty will remain in this economy for some time to come. Starting as they are at one-half the poverty level of real income, households earning their pay as unskilled laborers will need over 14 years to cross this threshold.

In the preceding I assume that 5% economic growth has no impact on the environment. (In reality, growth has negative environmental effects and the economically poorer a country the more likely it is that the poor will be impacted most directly by such change.) I assume that as the economy grows the composition of total output remains unchanged. I assume that the demand for all three categories of labor grows at the same rate. (It is likely that growth with create disportionately more demand for skilled labor) I assume, quite unrealistically, that population and therefore the number of households in each group remains the same. I also assume that the average household has the capacity to work as many additional hours as required . (Especially if the demand for skilled labor rises with growth and its supply is realtively limited then the premium skilled workers earn over unskilled and semiskilled labor will increase). Finally, what I have outlined here assumes that the unskilled and semiskilled remain so. Even with such assumptions while growth may eventually put an end to poverty, inequality will remain. One can argue that growth should reduce inequality. Those at an economic disadvantage should make the investments needed to join the ranks of the skilled. Primarily this means education. The poor couple or single parent working two jobs to send their children to school exemplifies this idea. The supply of unskilled and semiskilled labor should fall, that of skilled labor should rise and, given demand for the three types of labor, the enormous gaps in earnings should disappear. As skilled labor becomes relatively cheaper employers place skilled labor in more and more jobs. Persistent inequality, simply put, is due to one of two things: (1) fundamental differences in the abilities which people are endowed or (2) something that blocks adults in poorer families from helping themselves or their children get the skills needed to improve their relative position.

Rejecting the notion that inequality reflects significant differences in ability (a, b*), means that there must be obstacles that block the poor (here defined as unskilled and semiskilled/poor and working class households) from making the investments needed to join the ranks of the skilled and economically better off.

*The post WWII British Barlow Committee estimated that only one-fifth of those with abilities that put them in the top half of the population were actually enrolled in British universities.

Obstacles to education. Opportunity costs and financing:

Education involves delaying entry into the labor market and the poorer the family the more they depend on the labor of all those who can contribute, young and old. In short, the poorer a family is the higher the opportunity cost of sending a child to school. The unskilled, who we have assumed eek out an existence at less than half the poverty level, could not dream of delaying entry into the labor force, whatever the long-term advantages might be. If poor families cannot afford to fund their own education what of alternative sources of funding? Wouldn't employers benefit from better trained workers? What of those with the funds needed who would benefit from having invested in the high-yielding investment of a poor child's education, if that child shows promise?

Consider first the issue of worker training. Note that there is no guarantee that an employer will earn a full return on the resources invested in educating and training her workers. A company may find its better trained employees being offered jobs by other employers. The companies who hire these well-trained workers receive the benefits of the added education and training but pay none (or at least a fraction) of the costs. Employers recognizing this potential risk understandably will be unwilling to train and educate their own workers. All employers may endorse the idea of greater worker training and better education and quite sincerely mean it. But all will be unwilling to pay for such training and education themselves. It is far better to wait and let others pay, perhaps the workers themselves. These workers cannot. Everyone waits and nothing happens.

What about a stranger willing to fund the education of the children of a poorer family? If she could identify those with the greatest potential then perhaps. If she had some guarantee of their being able to complete their education and find employment it would be easier still. (However, a weak overall job market and continued discrimination against the social group the student belong to are deterrents to both borrowing families and lenders.) And finally, if the lender were confident that the borrower would honor her debt then funds almost definitely would flow into education until the returns fell into line with those of alternative investments. However it is hard to imagine any one of these preconditions -much less all three of them-being fulfilled.

Uncertain job prospects as well uncertainty of a family's willingness to repay such a loan are considerable. To compensate for such uncertainty, borrowers will have to offer collateral to secure credit. If the borrower is unable or unwilling to honor her debts the assets will cover the risk of default. The more uncertain the child's potential is or the more likely this child's family could default the more collateral required. Therefore, if a family is poor they will not be able to borrow because they lack collateral.

All employers realize the benefits of training and education. It is still true that no one employer or group of employers should be expected to train those who might one day soon leave their employ and work for someone else, taking the skills they've mastered with them. Poor families are too poor to afford the expenses of schooling. Lenders will tend to charge a far higher premium and require considerable amounts of collateral if they are to release the liquidity needed to fund school expenses. Poor families may tend to be pessimistic of the potential rewards of further education because of discrimination. The end result is that too few resources will be chanelled into education than would be the case if individuals were more confident of the benefits and costs they will face. Acting in the public interest the state has the power to break this deadlock.

Unfortunately, educational resources are often allocated based on their political returns not their economic returns. By political return I mean the payoff to politicians that comes from keeping vocal and influential constituents happy. Keeping vocal and influential constituents happy solidifies one's position in office. Property taxes are an important source used to fund primary and secondary public schools. They could be replaced with a much more equal distribution of state and federal money to schools. This does not happen because of a fear that the added funding poor schools receive will be at the expense of schools serving wealthier communities and make important blocks of voters/contributors unhappy. Here in the U.S. school funding is obscenely unequal with poorer districts taxing less valuable property at higher rates and ending up with far less money per student than one finds in other schools district that are literally just miles away (c, d).

The way in which public resources are distributed perpetuate inequality. Families' own resources do so as well. In Unequal Childhoods: Class, Race, and Family Life Annette Lareau argues that American middle class families can afford to involve their children in a variety of activities that place them at a distinct advantage in school vis-a-vis poor and working class children. She further argues that middle class parents engender a greater sense of entitlement in their children and advocate much more strongly for them. She gives examples of middle class parents who on a routine basis intervene on their childrens' behalf in school. In short, not only are public schools serving the middle class and upper classes better funded but they are made better overall because parents provide teachers with students far better equipped to deal with the rigours of school.

Anjini Kochar has observed the same sort of differences based on class in India. In "Emerging Challenges for Indian Educational Policy" she notes that poor children attending poorer schools do far worse than their fellow students in the same schools but who are from wealthier, better-educated backgrounds. (A poor school is one defined as having a high pupil-teacher ratio.) She offers the following as one possible explanation for this" ...better schooled parents may have access to substitutes for high pupil-teacher ratios, substitutes that are privately financed and hence less affordable for low-income households".

Essentially higher income and higher social class mean access to more and better quality education and hence perpetuates the advantages members of this group already possess. Even if lenders were willing to ignore the risks of lending to a poor family or the state were to absorb this risk it's unlikely they'd be able to identify promising candidates from poorer backgrounds. It is extremely naive to assume that given these obstacle that children from poor and working class who finish their secondary education will go on to the post-secondary level. Access to universities and college is limited to the wealthy. **

**Degrees from these institutions in turn determine not only career prospects but shape the student's personal life. A family that sends their student to a top university knows that there is a high chance that the personal relationships formed, including their child's marriage partner , will be with students from similarly advantaged backgrounds. To move toward greater equality of access to educational opportunities means that the multinational executives daughter might meet, fall in love with and marry the son of a janitor or a waitress rather than the son of a corporate lawyer or university president. In short, the better a college or university one attends the "better" sort of people one finds.

In less economically developed country higher education is irrelevant for all but a tiny minority of families. In India only one third of its children complete the tenth standard (tenth grade). The fact that 65% of boys and 60% of all girls are enrolled up to the fifth standard (sources: Kambar Planet India p. 209 and Kochar, op cit., p.2) is taken to be a major improvement over the situation India faced fifty years earlier. Kochar notes "..it appears that the margin of choice for many households in the country is slowly shifting away from a decision on whether or not to send their children to school to a decision on whether or not to enroll in the next level of schooling, i.e. middle schools" (Kochar, pp.2-3).

The quality of schooling for those who do attend is an important issue. In India overall one-third of those in the fifth standard cannot read or write (Kambar, p. 209) and in West Bengal only 7% of third or fourth grade students who did not receive private tutoring could sign their own names (source Workshop on Education, Equity, and Security, Kolkata 2002, see also Amartya Sen's "Radical Needs Modest Reforms" in a book entitled Indian Development: Selected Regional Perspectives.)

Higher education is equally irrelevant for many working class and poor families in more economically developed countries like the U.S. In the update of his Savage Inequalities Shame of the Nation Kozol argues the situation has improved little, if at all, since the 1990s. The schools which poor and working class families send their children put them on a nonacademic track and in the process families sending their children to these schools must settle for a different set of academic and career goals. As one young woman informs Kozol "You're ghetto-so you sew".

Most would agree that educational opportunity should be equally available to all. However, those in political power make choices about education that are often at variance with this principle of equal opportunity. Not because they are bad people but rather because having paid an enormous cost to win an election or an appointment they are interested in remaining there as long as possible. The most efficient way to do this is to keep those best able to keep you in office happy. Say that a senator was convinced of the social benefits of cutting funding from state universities to improve elementary schools in poor districts. Such a move would be political suicide. The gap between private and social benefits and default risk means that we cannot expect private iniative to solve the problem of inequality. Persistent inequality is then due to market failure made worse by government failure. Part of the solution to the problem of inequality is to be conscious of this. While there is very little we can do about the choices made by individuals that lead to market failure, there is potentially a great deal we can do about what takes place in government.

The myth of India's middle class.

There is palpable excitement about India among many people, especially Indians, both young and old and from all walks of life. In Chennai, Delhi, Kolkata, and Mumbai all sorts of changes are taking place. The construction of air-conditioned shopping malls, high rise apartment buildings, fly overs and fast food restaurants like Pizza Hut and KFC are symptomatic of the radical changes India is experiencing. Mira Kamdar in her new book Planet India does a wonderful job of documenting these changes, putting in print what many of us who are fortunate to regularly travel to India have seen. Much more important is that Kamdar keeps the other India in view as well. This is the much larger India where there has been no change of any real note or where living conditions have worsened. Interestingly, despite the balanced discussion one finds within, the cover of Planet India highlights only those things that confirm India's importance or suggest its rising properity: "India's middle class is already larger than entire population of the United States" "By 2008 India's total population of qualified graduates will be more than twice as large as China's" for example. We all like hearing such things because they suggests that India's three hundred year hiatus as an economically backward country of limited geopolitical importance is soon to end and that India will once again hold the position it held on the world stage before the industrial revolution. Also the reforms that have preceded India's rise seem to give advocates of freer markets fodder. The Indian boom , such advocates would argue, are entirely due to the the powers of private enterprise having been unleashed. The license raj has ended, India has embraced free trade and economic reform, etc. One wonders how many wishing to learn more about the wonderful things happening in India or free market enthusiasts set Kamdar's book aside once they begin to read chapter four "600,000 villages". Indeed the first three chapters of Planet India focus largely on the positive. In these chapters Kamdar highlights India's growing importance (or more accurately reemergence) both economically and culturally and discusses the increasingly global view of India's business community. However, from the fourth chapter on Kamdar presents a much more nuanced view of the changes taking place than what one typically finds in the popular media. What I would like to do here in this posting is to add some detail that Kamdar does not provide. I trust that this will help those who have read her book and are skeptical of the claims made therein and elsewhere that India's middle class is so large. It is not. "The myth of India's middle class, 300 million strong" It is often very difficult to trace the origin of statistics so confidently cited in the popular press. (For example, claims made regarding the number of Indian and Chinese engineers being trained compared to the number here in the States. For more on this click here) . The claim that India possesses a large and growing middle class is no exception to this. Presumably this statistic, that India's middle class is over 300 million people, comes from NCAER, the National Council of Applied Economic Research. NCAER is based in India and does excellent work on all aspects of the Indian economy. NCAER did a study in the 1990s in which some 87.8 million households were identified as among the rich, the consuming class, or "climbers" who stood on the next rung down of the economy ladder after this consuming class. The first thing to note is that the consuming class as defined by NCAER constitutes an economically diverse group of families with those at the very top of this group earning over 4.75 times those at the bottom of this group. The range in earnings is from Rs 45001 to Rs 215,000. The second thing to note is that while median household income in the United States is around $46,000 (see Income, Poverty, and Health Insurance in the United States: 2005) those at the bottom of the consuming class in India (using an exchange rate of Rs40 to the dollar to convert the rupee figures into dollars) earned an equivalent of approximately $1125 per household. Using the same figure to convert rupees to dollars even those at the top of this cohort had an annual HOUSEHOLD income of $5,375! However conversion of income into U.S. dollars using the exchange rate in economically less developed countries is a dangerous enterprise. It tends to to drastically understate how far earnings actually will go. India is no exception to this. As a result, we can convert rupees into dollars using the more accurate "purchasing power parity ratio" or PPPR. Using the PPPR families at the bottom of the consuming class earn $5625 per household while families at the very top could be said to have earned the equivalent of about $27000. In short, even when we more accurately measure earnings, among those at the very top of this very large group, representing 32.5% of India's households , you find households with income that is less than half of median family income in the U.S. (the figure of $46,000 quoted above was for a family of four, the statistics for India imply average household size or family size of over 5 persons per houshold). A little bit more to the point, those at the top of this group, taking differences in houshold size into account, earned what would place them at the poverty level in the U.S. And just as poor families in the U.S. do provide a market for toiletries, soft drinks, chips and soap India's consuming class represents a part of the market for small packets of laundry detergent, bath soaps, and so on. The point remains that the sort of images that the term middle class calls to mind for the average American are far different from the circumstances families in India's second highest income class (the group that I am discussing is listed directly before the "rich" in NCAER's study) live in. At best, the majority of India's middle class would be considered to be living just at the poverty line here in the U.S. A third factor that is striking if one looks at the NCAER stats is that while 36% of urban families or households were identified as part of the consuming class, only 13% if rural households were to be counted as part of this group. One must remember that as we look at these figures 72% of India's households were to be found in rural areas when these statistics were collected. Assuming that those at the high end of the consuming class are largely concentrated in urban areas, the urban consuming class represents only about 10% of India's households (16.6 million households out of a total of 164.8 million). As far as I am aware a question that has not been raised is how influential NCAER's report was, reforms or no, in attracting foreign investment into India. What is telling is that one finds articles such as those from the International Herald Tribune in 1996 and 1997 which highlight the diappointment companies coming into India, with their own understanding of what middle class means, faced. The confusion continues today, with articles such as the "Middle Class Has Arrived" from Rediff.com that, following more recent studies published by NCAER (The Great Indian Middle Class 2004 and the The Great Indian Market 2005), puzzling over how only 10% of these "middle class" families have life insuranbce, barely 1% have medical insurance, 2% have credit cards and falf of the TV sets they own are small (14") black and white sets. A summary of The Great Indian Market 2005 can be found at http://www.fadaweb.com/indian_mkt_05.htm. In this summary there is a table that is of great interest entitled "growing prosperity" It breaks down Indian households into eight different income classes that range from the deprived (in 2001-2002 135.4 million of India's 188 million households or 72% of the total) to the super rich (20,000 out of the same 188 million households or a tiny fraction of 1%). The deprived consist of households getting by on less than Rs90,000 a year. Using a conversion factor of RS8 to the $ (the purchasing power parity ratio used earlier) this means per household income of less than $11,250 a year. For an average household size of over 5 persons per household (5.47 person per household) this means getting by on about $2000 a year per household member. (The "super rich" earned incomes over $1,250,000 a year per household.) What I have done with the numbers given in the table from the FADA summary of NCAER's The Great Indian Market 2005 referred to above is: (1) convert them into dollar figures using the purchasing power parity ratio used earlier and (2) calculated the number of households in each of the eight categories identified had each group grown at a rate equal to the overall growth in households. The latter would leave the relative percent of Indian families in 2001-2002 at the same levels that they were in 1995-1996 (nearly 80% of households with income less than $11,250 a year rather than the 72% one actually saw in this category in 2001-2002). From this exercise several things are worth noting. The first is that while the number of families living on less than $11,250 a year has grown by some 4 million plus households if 2001-2002 were simply a replication of 1995-1996 there would have been 14 million MORE families in this category than there actually were. Between 1995-1996 and 2000-2001 India's real GDP grew some 32% so this shift in part represents some households moving into higher income categories. One wishing to look at this data in the most optimistic terms possible might argue that in this very short period of time the lot of many Indian families has improved significantly. However note the following: (1) First the number of Indian households living at a level less than half the poverty level for a family of four in the United States remains at 72%. (2) Whether those left behind in poverty remain as poorly off as they were before or in fact have seen their situation worsen cannot be answered with these numbers. (3) How much growth, how far beyond the $11,250 line the 41 million households one finds in India living at approximtely half to 100% of the poverty level in the United States have moved is again a matter on which this data is silent. In sum, a pessimist would note that the 131 million families in dire poverty in 1995-1996 remained there in 2000-2001 despite 32% growth in the Indian economy overall, that their earnings in real terms may have fallen , that the majority of the new families formed that escaped deprivation found themselve in the next cohort of "aspirers" with annual earnings of anywhere from less than one half to 100% of the poverty level in the United States and finally, that ths group together with the desprived remain a very solid majority of Indian households.