EMPLOYMENT AND THE DISTRIBUTION OF INCOME

Andrs Velasco
June 2011

I. The issues

Motivation

My experience as Finance Minister Chile: heated discussions on inequality. But...

Focus

only on the wage distribution Discussions on the shape of the wage distribution very ideological: generate more heat than light Little recognition that wage distribution often changes slowly, along with its fundamental determinants (eg. education)

Caveat: focus today on distribution of labor income. Government transfer policy can and does have a large impact on inequality, but that is well understood

Motivation (cont.) ( )

Can we do better?
One

alternative: focus on employment performance There are large differences in this performance performance, even among countries of similar per-capita income Are there low hanging g g fruit here? Time advantage g

Caveat: when thinking about improving employment performance, also need to get away from ideological divides
Right:

make labor market flexible and everything will be ok Left: enhance collective bargaining and everything will be ok

The issue

To measure inequality we often use the distribution of per capita household income (PCHY) If working is a binary choice, for household j
PCHY j =

Y
i =1

ij

Mj = number of people working in household Nj = number of members of household Yij = income of person i
PCHY j = Yj M j Nj

Nj

If all working people receive the same income,

Households differ greatly not only in their Yij , but in their Mj and Nj as well. Also in the number of hours they work, not considered here.

Today y
Focus on the implications of variations in Mj and Nj on the distribution of income If Mj and Nj are unequally distributed and if Nj varies negatively with Yj and Mj varies positively with Yj then inequality in PCHY can be very large indeed More a plea for more research than a presentation of a finished research project

This issue in the literature

Present, , but not central, , in the literature on the microdynamics of income distribution
Bourguignon,

Ferreira and Lustig (1998) Bourguignon, Ferreira and Leite (2002) Szkely and Hilgert (2000)

L Largely l absent b from f flagship fl hi publications bli i

2006

WDR: Equity and Development 1999 IDB: Facing up to Inequality in Latin America 2004 IDB: Good Jobs Wanted

Plea: focus on this!

The road map p

I. II.

III. IV.

V.

VI.

The issues Employment rates and the distribution of employment: cross country evidence Chile: the distribution of employment and income Chile: the distributional impact of changes in employment rates Low income households with low employment rates: what are they like? Tentative policy implications

II. E II Employment l t rates t and d th the distribution of employment: p y cross country evidence

Employment p y rates among g the (mostly) ( y) rich

Employment rate (25-64), OECD Countries
100 90 80 70 60 50 40 30 20 10 0 y e k r u T y r a g n u H y l a t I n i a p S e l i h C o c i x e M d n a l o P e c e e r G e p o r u E d n a l e r I m u i g l e B c i l b u p e R k a v o l S s e i r t n u o c D C E O 9 1 n o i n U n a e p o r u E a e r o K a c i r e m A h t r o N 5 1 n o i n U n a e p o r u E Males e c n a r F s e t a t S d e t i n U s e i r t n u o c 7 G a i n o t s E g r u o b m e x u L

l a g u t r o P

c i l b u p e R h c e z C

a i n e v o l S

a i n a e c O

m o d g n i K d e t i n U

a i l a r t s u A

d n a l n i F

a i r t s u A

y n a m r e G

a d a n a C

n a p a J

s d n a l r e h t e N

k r a m n e D

d n a l a e Z w e N

n e d e w S

y a w r o N

d n a l r e z t i w S

d n a l e c I

Source: OECD

Females

Total

Employment p y rates among g the not-so rich

Employment rate (25-64), Latin America
120 100 80 60 40 20 0

Male

Female

Total

Source: Own calculations using countrys economic surveys

The unequal q distribution of employment p y

Employment rate by income decile 100

90 80 70 60 50 40 30 20 10 0 1 2 Mexico 3 4 Uruguay 5 6 7 Brasil 8 Chile 9 10

Argentina

Source: Own calculations using countrys economic surveys

III. Chile: the distribution of employment l t and di income

Chile: income dist. among g those who work

Monthly income those who work (dollars)
3500
10/10 ratio: 17.7

3219

3000 2500 2000 1500 1000 500 0 1 2 3 4 5 6 7 8 9 10 181 320 388 440 497 572 667 853 1180

Source: Own calculations using CASEN 2009.

Chile: household income distribution

Monthly household income (dollars)
7000
10/10 ratio: 46,2

6150

6000 5000 4000 3000 2000 1000 133 0 1 2 3 4 5 6 7 8 9 10

Source: Own calculations using CASEN 2009.

2387 1079 1303 1701 0

411

574

704

849

Chile: p per capita p household income dist.

Monthly household income per capita (dollars)
3000
10/10 ratio: 78,5

2500 2000 1500 1000 500 31 0 1 2 3 4 5 6 7 8 9 101 236 296 381 507 766 189

2399

144

10

Source: Own calculations using CASEN 2009.

Chile: a sad distributional story y

Monthly income per capita, total household income and income of those who work (US dollars)
10/10 ratio: 17.7
6000
6150 296 572 10 79 381 667 1 303 1701 236 497 849

7000

10/10 ratio: 46,2

5000 4000 3000 2000 1000 0 1 2 3 Income per capita 4 5 6 7 Income ofthose whowork 8 9 10 Householdincome
31 181 133 101 320 411 144 388 574 189 440 704 2399 32 219

10/10 ratio: 78,5, Gini: 0.584 G 0 58

2387 766 180 11

Source: Own calculations using CASEN 2009.

507 853

Message g

The h number b of f people l who h work k per h household h ld make a big difference Th number The b of f members b of f the h household h h ld make k a big difference A d both And b h are very unevenly l distributed di ib d accross income deciles

The unequal q distribution of jobs j

Household size, jobs per household and jobs per capita

10/10 ratio: 0,8

4.5 40 4.0 3.5 3.0 2.5 2.0 1.5 1.0 0.5 0.0 1 2 3 Householdsize 4 0.5 0 5 0.15 1.1 0.26 1.2 0.31 36 3.6 4.1 4.0 3.8

10/10 ratio: 3,2

36 3.6 37 3.7 3.4

10/10 ratio: 4,1

3.4

3.1 2.8 1.8 1.7

1.4 0.36

1.5 0 40 0.40

1.6

1.7

1.7

0 45 0.45

0 49 0.49

0 52 0.52

0 56 0.56

0 61 0.61

10

Jobsper household

Jobsper capita

Source: Own calculations using CASEN 2009.

IV. Chile: the distributional

impact i t of f changes h in i employment rates

Simulation 1

Take all households with a per capita income less than the national average Assume that in each of them the number of people p p (18-64) who work is equal to the national average Those who begin g working g make the average g of what people already made in that household If there was no one working, the entrant makes the average wage for that decile Consider two cases: fixed wages (upper bound for effect) and wages that adjust (lower bound)

Equilibrium q in the market for labor

S

Whigh

D,

Wlow

Llow

Lhigh

Simulation 1: Results
3000 2500 2000 1500 1000 500 0 1 200% 150% 100% 50% 0% 1 2 3 4 Constant wages 5 6 7 8 9 10 2 Before 3 4 5 6 7 8 9 10 After: Constant wages After: Non-constant wages

Non-constant wages

10/10 ratio = 78,5 , Gini = 0,584

10/10 ratio = 32.3 , Gini = 0,541

10/10 ratio = 34.9, Gini = 0,567

Simulation 2

Take all households with a per capita income less than the national average Assume that in each of them the number of people (18 64) who (18-64) h work ki is equal l to t the th national ti l average In addition, assume that in each of these households all workers work 45 hours a week Those who begin working make the average hourly wage in that household If th there was no one working, ki the th entrant t t makes k th the average hourly wage for that decile Consider two cases: fixed wages g (upper ( pp bound for effect) and wages that adjust (lower bound)

Simulation 2: Results
3000 2500 2000 1500 1000 500 0 1 400% 300% 200% 100% 0% 1 2 3 4 Constant wages 5 6 7 8 9 10 2 Before 3 4 5 6 7 8 9 10 After: Constant wages After: Non-constant wages

Non-constant wages

10/10 ratio = 78,5 , Gini = 0,584

10/10 ratio = 21.5 , Gini = 0,534

10/10 ratio = 17,5 , Gini = 0,547

Simulation 3

Take all households with a p per capita p income less than the national average Assume that in each of them the number of people (18-64) who work is equal to the number in decile 10 In addition, assume that in each of these households all workers work 45 hours a week Those who begin working make the average hourly wage in that household If there was no one working working, the entrant makes the average hourly wage for that decile Consider two cases: fixed wages (upper bound for effect) ff ) and wages that adjust ( (lower bound) )

Simulation 3: Results
3000 2500 2000 1500 1000 500 0 1 500% 400% 300% 200% 100% 0% 1 2 Before 3 4 5 6 7 8 9 10 After: Constant wages After: Non-constant wages

4 Constant wages

10

Non-constant wages

10/10 ratio = 78,5 , Gini = 0,584

10/10 ratio = 17.4 , Gini = 0,512

10/10 ratio = 15,1 , Gini = 0,531

V. Low income households

with ith low l employment l t rates: what are they like?

Poorer workers work fewer hours

Monthly hours of work (18-65 years)
Total 156 167 168 173 173 175 176 175 175 174 Males 170 176 178 180 181 183 183 180 183 181 Females 134 148 150 160 161 164 166 166 165 165

1 2 3 4 5 6 7 8 9 10

Source: Own calculations using CASEN 2009.

Poorer deciles have especially low employment among the young

Employment rate by age
Decil 1 2 3 4 5 6 7 8 9 10 18-24 11 21 32 40 42 48 49 47 41 35 25-34 25 46 55 65 72 75 77 80 84 85 35-54 35 56 62 66 71 75 79 80 84 88 55-65 22 37 41 47 52 54 56 66 71 73

Source: Own calculations using CASEN 2009.

Poor deciles have especially low employment among women

Female employment rate by age
Decil 1 2 3 4 5 6 7 8 9 10 18-24 8 17 22 30 34 38 43 41 39 29 25-34 18 29 38 51 58 63 68 72 76 80 35-54 24 34 41 46 53 58 65 66 71 77 55-65 15 21 21 28 30 33 36 45 53 51

Source: Own calculations using CASEN 2009.

Poorer deciles have more self-employed workers, more domestic servants & fewer public employees

Decil 1 2 3 4 5 6 7 8 9 10

Employer 0.5 0.4 0.4 0.7 08 0.8 1.3 1.9 2.8 3.8 11.6

Self-employed 22.0 14.5 14.0 13.3 17 8 17.8 18.0 18.7 20.9 26.1 21.4

Public sector 7.1 7.4 7.1 8.5 81 8.1 8.6 10.5 12.7 16.0 18.9

Private companies 59.3 70.3 70.8 71.1 67 3 67.3 66.8 64.2 60.4 52.1 47.7

Domestic servants 11.1 7.4 7.7 6.4 59 5.9 5.4 4.7 3.3 2.0 0.5

Source: Own calculations using CASEN 2009.

Poorer deciles have more women

Female among population by decile (%)
60 58 56 54 52 50 48 46 44 1 2 3 4 5 6 7 8 9 10

Source: Own calculations using CASEN 2009.

Poorer deciles have more households with children under four

Percentage of households with children younger than 4 years
30.0 25.0 20.0 15.0 10.0 5.0 0.0 1 2 3 4 5 6 7 8 9 10

Source: Own calculations using CASEN 2009.

Poorer deciles have more rural residents

Percentage of households in rural areas (%)
30 25 20 15 10 5 0 1 2 3 4 5 6 7 8 9 10
Source: Own calculations using CASEN 2009.

Poorer deciles have less schooling g

Years of schooling (people age 18-65)
16 14 12 10 8 6 4 2 0 1 2 3 4 5 6 7 8 9 10

Source: Own calculations using CASEN 2009.

Poorer deciles have more handicapped people

Percentage of handicapped people
16.0 14.0 12 0 12.0 10.0 8.0 6.0 4.0 2.0 0.0 1 2 3 4 5 6 7 8 9 10

Source: Own calculations using CASEN 2009.

VI. Tentative policy implications

What keeps poor people from regular employment?

Key observation: there is no one factor, and therefore there is no one solution You need an approach that does more than simply make the labor market more flexible. flexible make

Possible policy priorities

Supply side

Child care Urban, housing and transport policy Employment subsidies (supply side) Flexibility of working hours and shifts P d Prudence with i h minimum i i wages Employment subsidies (demand side) Anti-discrimination legislation with teeth Facilitate information flows Centralize info: bolsas de trabajo

Demand side

Bringing supply and demand together

Need more research on the subject!

EMPLOYMENT AND THE DISTRIBUTION OF INCOME

Andrs Velasco
June 2011