This is the second essay on the economic effects of education. Link to first in the references1.
A lot of economists have called for expanding access to education as a means for reducing inequality. I remember reading several articles around 3-4 years ago regarding this matter. The subsequent quiet about this makes me wonder what happened since then.
At any rate, like almost everything in economics, championing education as a cure to growing inequality could actually backfire.
I pointed out previously about using education as a means of reducing poverty2.
However, increasing income and wealth is not the same as reducing inequality. One is about the absolute amount held by an individual while the other is a relative measure. An economy can experience all of the following at the same time:
- Falling poverty levels: Poverty is simply an extended period of low income such that the economic agent is not able to access life’s minimum necessities. If this phase of earning a low income can be broken, then the economic agent is able to escape poverty.
- Increasing inequality: Inequality is a relative measure that shows what is the share of something between different sections of a group. So the spread of total income among the population gives the income inequality.
- Rapid growth: Growth is the result of increasing production, which is fueled by increasing demand (the other way requires that a sizeable proportion of the population is wealthy enough already to make the investments needed). If a large enough percentage of the population sees a large-enough increase in their incomes, then the economy will experience strong growth because there will be demand for the output.
How can an economy exhibit all three at the same time? How can there be increasing inequality with falling poverty levels? Didn’t recent research by the OECD3 demonstrate a negative relationship between growth and inequality? [Ok, the paper did not conclude that inequality reversed or halted growth rather that increasing inequality led to lower economic growth.] How can falling poverty levels and increasing inequality both happen at once?
Poverty is measured by how much (or how little) of life’s necessities a person has access to. It is, at least, a mathematical possibility that economic output can grow so much that its division among the people will lead to lower poverty (more people earning enough to access life’s necessities) with the top class of people earning a larger share from the economic output. If the drop in poverty rate results in a larger portion of the population coming to own more money for discretionary consumption (spending money because you have the money to spend), such an economy will also show a healthy annual growth rate although inequality will be rising as there will be demand for the resulting production.
With inequality growing continuously in most countries, particularly in countries where socioeconomic institutional frameworks are weak, inequality has come to be one of the defining challenges faced by economists and social scientists in recent times.
Economists have promoted using the spread of tertiary education as a way of tackling the scourge of rising inequality. However, this is a very myopic solution to a problem that acts on a much longer time scale (dependent on economic policies and prevailing social conditions). Even if the short run effect may be to reduce inequality, the long run equilibrium will be to increase inequality, at what may be increasing rates of increase (inequality will grow faster with the passage of time).
The mechanism that will lead to an increase in inequality needs some explanation as it may seem counter-intuitive to most people. How can increasing incomes for people lead to more inequality and not less?
Assuming that the total value produced can be broken down into labor productivity, capital productivity and a profit markup, the first step would be to simplify it to leave behind only the terms we are interested in analyzing, the productivities of labor and capital. So we do away with the profit markup by taking it to the other side of the identity, this term can be referred to as “produced value” (not “total”) and is a summation of the productivity of capital and labor. So produced value is split between the productivities for capital and labor, which are the returns to capital and labor respectively (assume that, though reality might not match precisely this assumption).
There is little argument against the fact that a bulk of productivity improvements has been capital productivity improvements. In recent years, most menial jobs, repetitive tasks, and many blue collar jobs have also been threatened by capital improvements (either because the capital productivity increased, thereby requiring less labor, or because capital itself replaced labor, requiring even less labor). So the trend has been to have larger returns to the capital than to labor which has led to labor income (wages/salary) stagnating or falling (let’s leave unions out of the discussion now). To combat this relative decrease in labor returns, economists have called for expanded access to education to ensure that more workers get higher paid jobs. Poor suggestion. Expanding access to tertiary education is more likely to worsen than alleviate inequality in the medium run even if it lessens inequality in the short run.
Most of the jobs that pay well are jobs requiring the worker be skilled in the use of capital (computer programmers, for one). A lot of the development that takes place usually is aimed at producing capital that can do better what a person does or producing capital that can better augment what a person does. This means those with higher education will be employed in places where the aim will be to require less labor (blue collar workers particularly) eventually. That means that, initially, average labor income could see a rise. As the new capital enters the workforce, the demand for labor will then be lowered as the machines will be doing the same work. Capital returns then will be higher as its productivity will be relatively higher and that of labor will be lower as its productivity will be relatively lower. So inequality will show the same increase soon enough.
The growth of inequality, then, will depend on two dynamics,
- who has ownership of productive capital,
- who can come to own productive capital.
There is little to be discussed about what “productive capital” stands for and we can move on from that.
Most assembly line jobs pay just enough to be considered respectable. Jobs that involve natural human thought as an input tend to pay more. Finally there are jobs that require providing administrative or managerial oversight to the entire production process. Managers are a different category altogether, as evidenced by their multi-million dollar salaries.
This means that over time, as education attainment spreads among the population, inequality may see a decrease but will see an accelerated growth as capital productivity grows by leaps and bounds ahead of labor productivity. In simpler terms, wealth inequality will lead to growing income inequality.
I’m not the only one to have thought of this eventuality though, those who make a career of this field are wondering the same thing4.
The solution to growing income inequality does not lie with tinkering any facet of the capitalist system, it lies with overhauling the entire system altogether.
Bonus reading: The following article5 from The Atlantic, with a link to a study, stating what I argued over two essays.