Halting the rising inequality

Halting the rising inequality

Francois Voltaire, the 18th century French philosopher, once said, “Men are equal; it is not birth but virtue that makes the difference". According to the International Labour Organization’s (ILO) World of Work Report 2008, India is among the worst performers in terms of rising income inequality. Neither “birth" nor “virtue" can take the blame. One of the issues here is of low-quality labour force employed inefficiently. Part of the answer lies in a diverse, vibrant schooling system and a policy environment that supports job creation in the organized sector.

ILO’s study found that between 1990 and 2006, the share of labour in India’s national income fell as the annual wage growth rate of 1% lagged behind productivity growth of 4.5%. That is no surprise. Nobel laureate Simon Kuznets, in his pioneering empirical work, showed how inequality first rose, then fell, with the growing prosperity of Western nations treading the path of industrial revolution. This is the inverse U-shaped Kuznets curve. A persuasive causal explanation is that initially much of the growth in efficiency comes from capital-intensive production, while in the later stages of economic growth, “human resource" is the key driver of efficiency.

Human resource’s contribution to output originates from two factors: the quality of labour and innovative organization of production. Unfortunately, India is in trouble on both counts. First, Indian schools are of abysmal quality. According to MIT Poverty Action Lab’s 2006 study in Mumbai, 25% of all children in classes III and IV can’t even recognize letters of the alphabet. An irrelevant, generic curriculum erodes the potential output of these future members of the workforce.

Second, at least 90% of Indians work in the unorganized sector, where methods of production are appallingly primitive. Constraints on private investment in agriculture and a “mostly unfree" economic environment (India ranks 115 among 157 nations in Heritage Foundation’s 2008 Economic Freedom Index) hinder organized employment.

Interventionist measures, such as the National Rural Employment Guarantee Scheme, would prove mainly to be short-term ploys. The real solution lies in India becoming a better place to work.

What is the solution to income inequality? Write to us at views@livemint.com