How do we reduce inequality?

AN interesting debate has been raging among Gilad Isaacs, Mike Schussler, Morne Oosthuizen and Jeremy Seekings on what needs to be done to reduce inequality. Much of the debate is crafted around the significance of the recent strike by platinum mineworkers.

If one strips it of its complexities, one should be able to say the debate tries to answer the question whether higher wages for low income groups have the potential to reduce inequality.

There are methodological issues embedded in the debate which would be rather cumbersome to discuss here. What I do want to discuss is the thesis argued by Seekings.

It is, in summary, that whether wage increases will reduce inequality or not depends on whose wages are increased. He argues: “The direct effects of wage increases on inequality are much larger if the wages of poor people rise than if the wages of richer people rise.”

Viewed abstractly, the proposition sounds convincing. But let us contextualise it.

Then we have to recall that Seekings makes this argument in an effort to rebut Isaacs’s argument that higher wages for platinum mineworkers and others similarly placed have the potential to reduce inequality. He says, in effect, that Isaacs’s approach might help reduce inequality among the specific groups he discusses, but has little or no potential to reduce “overall” inequality.

The difficulty Seekings’s thesis must run into is that millions of South Africans of working age are unemployed. Therefore it is not possible to speak about any wage increase for them.

Therefore inequality, for them, cannot be reduced through wage increases. It seems, therefore, that his argument is self-undermining.

Seekings is however aware of this, for he argues, at a later stage: “The fraction of inequality accounted for by unemployment is much larger than 38%”.

He also argues: “If you really want to reduce inequality, redistribute to the poor through either job creation or pensions and grants that are targeted on the poor. Don’t take money from the rich and pay it to people who are already in formal employment.”

But here again his argument seems self-undermining. He criticises, I think rightly, Isaacs for ignoring the “employers’ choices between capital/skill-intensive and labour-intensive technologies” in the way he (Isaacs) articulates what needs to be done to create jobs.

The reality of the situation is however that these choices also have implications for the thesis Seekings argues. Many of the unemployed people in South Africa are casualties of those choices. That much is evident from a later paragraph in Seekings’s article: “Over the past 40 years, rising wages for less skilled workers in formal employment have pushed employers to switch to more capital- and skill-intensive production”.

I don’t think that “pensions and grants targeted on the poor” will save Seekings’s thesis from undermining itself. Quite the opposite.

He places a lot of reliance on the Gini coefficient in developing his critique of Isaacs. He argues that in a situation of complete equality South Africa’s Gini coefficient would be zero and that in a situation where one person had all the income our Gini coefficient would be 1.

Currently, our Gini coefficient is in the order of .67. He suggests that if we took 5% of national income and paid it to households in the seventh and eighth decile (such as households of people employed in the platinum mines) our Gini coefficient would be .65 and .62 if we gave the 5% to people in the poorest income decile.

For the purpose of the argument I want to make, it is not important to debate whether or not there would be a significant difference in denting inequality in the two scenarios.

The point is that we are already doing what Seekings suggests needs to be done by way of pensions and social grants, and yet our Gini coefficient stands at .67 and he considers that to be “very high”. Therefore we must accept that the intervention has not done what he says it might.

But in any event there’s a limit to which any government can keep on increasing the tax burden on citizens before they revolt. Therefore we must accept that there’s a limit to which the government can extract money from the citizens in order to address the issues raised in the debate by way of pensions and social grants.

What now? It seems to me we must face up to the consequences of the socio-political choices we have made.

It does not seem to me there’s a basis, within the choices we have made, on which we can demand that employees should compare themselves with worse-off members of wider society, rather than better-off colleagues where they are employed, in approaching wage increase negotiations. Therefore we have to accept that, for as long as the social relations we have called forth subsist, the wage differential between the lowest and the highest paid employees of the same establishment will remain a bone of contention.

Therefore we cannot hope to avert strikes like that of recent platinum mineworkers by encouraging workers to embrace egalitarian notions after we have constructed social arrangements on the precept, “everyone for himself, and God for us all”.