Chile: Narrowing income inequality, but at what cost?

Eduard Porter writes in the New York Times on the declining income gap in Chile. For anyone concerned about tackling inequality it makes interesting, but ultimately disturbing reading. It echoes something that Dalia Marin has raised in Europe: the declining premium on education. But Porter suggests very different reasons to those put forward by Marin.

Porter notes that the income gap decline (albeit from very high levels) is seen across Latin America, drawing on this paper from the Center for Global Development:

Government redistribution appears to have played some role in reducing the Latin American income gap. Government programs, like the cash transfers under the Oportunidades program in Mexico or the Bolsa Familia in Brazil, have increased the income of poor families.

Still… [the Center for Global Development paper]… concluded that new government transfers and changes in pensions accounted for only 30 percent of inequality’s decline.

So what accounts for the remaining 70 percent flattening in the wage premium? Porter points to the big increase in education across the continent, an over-supply of graduates entering the job market. But the data disagrees. The wage premium started dropping a decade after the boom in graduates. In Chile, there is a suspicion that it is the low quality of the education those graduates received that is to blame:

Latin America’s education boom has driven the proliferation of private colleges, some of which are of lower quality. The students may be of lower quality too — coming from families that received poorer elementary and high school education and are less prepared for college.

Together, these dynamics would reduce the skill level of newly educated workers, shrinking the wage premium they could command over those without a college education.

But there is a different explanation. In Europe, Marin worries that automatization and robotization are reducing the education premium. In Latin America, Porter points to commodities:

The declining return to education … is not simply about the supply of educated workers. It also has to do with a decline in the demand for skill.

From soybeans to copper, China’s insatiable demand for Latin America’s raw materials pushed up the value of currencies across the region even as its cheap manufactured exports undercut Latin American countries’ rickety industrial base, reducing their demand for skilled workers.

So, for Porter, the story of declining income inequality in Latin America, is explained by two factors:

• government redistribution backed by a commodities boom;
• educated young people graduating into economies that do not require their skills.

For anyone interested in innovative solutions for closing the income gap, this is not encouraging news.

Author: Adrian Monck is Managing Director of Public Engagement at the World Economic Forum.

Image: “Santiago de Chile” uploaded by Metaforico at pt.wikipedia. Licensed under Public domain via Wikimedia Commons.