Solution to Economic Inequality

I have read different articles advancing the idea of using “education” to reduce inequality. The short idea is to use greater access to tertiary education to justify paying a higher wage/salary to the workers thereby reducing inequality. A glut of degree holders in the labor market will depress the wages paid. Not much of a solution to inequality. Also there are several labor saving technologies in the pipeline (and productivity enhancing ones as well).

The short of the labor saving or productivity enhancing technologies is that it increases the total output. The effect will be outlined below.

Those comfortable in mathematical intuition will realize that if the total product is increasing and a smaller share of this increase goes to paying labor, then it means that the marginal product of capital, the return on capital, increases. It means that the owner of the capital (already owning large amounts of wealth) will make a larger income.

For those uncomfortable with mathematical intuition, a simple numerical example might help. Suppose the factory owner places a new machine, that requires a bit of labor retraining, as a consequence of which output doubles (makes it easier to grasp the argument). Of that 100% increase in output, 15% goes into paying the labor a higher wage/salary, 65% goes into covering the costs of production, and the remaining 20% is kept by the capital owner. It should be obvious that a larger share of the greater value created is being captured by the capitalist and this will, again, worsen income inequality.

Why not create an incentive for the capital owner to pay a higher wage/salary by giving them more education?

If everyone has a degree, won’t the “price” of a degree be worth less? Is education by itself enough to make the capitalist to pay more to labor? Judging from basic market forces and trends over the past 5 decades, no and no. It is enough to force the capitalist to not pay less but will not necessarily lead to more being paid. [If you’re going to draw an example from the period post-WW2 to the early 1970s, neoliberal free market economics was not the dominant economic thought then.]

More fundamentally, is education by itself enough to bring about the equality in pay that is desired by many people? No.

Tertiary education (which is being touted as the way to reduce inequality) is a system the entry to which requires acceptable performance in the secondary level, which can largely depend on performance in the primary level. One of the fronts being advertised as successful in South Asian developmental  stories is one of giving the poor better access to primary education. However, better access to education is not same as receiving the benefits of education (educational outcomes).

“Gaps in learning outcomes are large in other countries of the region as well. Bangladesh and Sri Lanka have achieved a high level of equality in years of schooling, but learning outcomes differ significantly across income groups. In Bangladesh, student achievement in English was 250 percent higher among the richest quintiles than among the poorest. In written math competency, the difference was more than 100 percent (Asadullah and others 2009). In Sri Lanka, the test scores were a full standard deviation higher among students from the richest quintiles, relative to those from the poorest students (Aturupane, Glewwe, and Wisniewski 2013).”

Addressing Inequality in South Asia, 2014

The above paragraph gives evidence that access to education and educational outcomes are not the same thing.

What determines educational outcomes once access has been won? I don’t have the studies quoted or to others at hand, what I can extrapolate is the following.

  • Take the example of the mathematics. For almost everyone, it is slogging through the entire flow that one grasps at the mathematical thinking and logic. You need time and energy for that. When you have to spend most of your day working to get some food to eat, how much of what are you left with to devote to study?
  • Take English. To study a language properly requires that you continuously use that language (verbal and written) under the tutelage of a person who is fluent in that language.
    Where do you get to continuously use a foreign language in a socioeconomic backward setting? (You have to use the commonly used native language then.)
    Are the teachers fluent in that language AND the native language?

The matter of giving education to people is not as simple as it is being made out to be; just like trying to give everyone housing in the USA led to the massive housing bubble that pulled the world down with it. Almost all economists missed that gigantic bubble even as it blew up in their faces. So forgive my skepticism on hearing renowned economists saying tertiary education is a way to promote equality.

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