Wednesday, December 12, 2007

Inequality and Growth

Quick post to get feedback on an idea.

I am beginning to think that inequality, in and of itself maybe an important component in at least the level of economic activity if not the rate of growth.

Why?

Well, traditional economic theory is based on the idea that people either work or not. If they work they get the prevailing wage. Higher wage can potentially encourage people to work more but even this is controversial since higher wage people don't "need" to work as much.

The thing is work is not work is not work. That is, the same person doing two different jobs could enjoy radical differences in productivity and hence income.

For example, it is not uncommon for an investment banker to be paid on the order of $500 an hour. Unless we think that the investment bank is in the business of giving away profits we have to concede that she is then producing at least $500 in value for the firm.

Suppose that same women were to become a cashier at the local dollar store. Now, no doubt she will be a great cashier. She will probably be faster and make fewer errors than the typical cashier but how productive could she be really? Could she produce ten dollars an hour, maybe at the outside fifteen dollars an hour worth of economic product.

Lets say she produces ten dollars an hour. Then the choice of this young woman to become a cashier rather than an investment banker will cost the economy $490 per hour of output. That's the same as if 49 cashiers had become unemployed.

Therefore, it much more important that we get this young woman to work in the correct field than it is that we get her to work at all.

Getting her to work in the right field doesn't depend so much on what the average wage is, or what the average tax rate is for that matter. It depends on the inequality in after tax wages between fields.

One thing that is striking about Europe is the intellectualism of the working class. Waiters on Champs-Elysees are able to and interested in discussing all manner of geopolitical issues. Socialist tend to applaud this as a mark of France's egalitarian nature. Even the wait staff are literate members of the body politic.

Yet, I am struck by the economic waste. If this person is both capable of and interested in geopolitics then they should be assisting the world in geopolitical decisions, not serving baguettes.

If it turns out that we can both educate and interest everyone in geopolitics, finance and the like, then no one should be employed as a waiter. After all, its not that difficult to grab your own baguette.

13 comments:

Nu said...

Are you assuming a waiter at Les Champs Elysées is somehow representative of all the waiters or even the "working class" ?
I have a friend who was one. He made 5 times the minimum wage, had specialized trainning and yes, having some culture was requirement.

And furthermore, countries like France don't really have that kind of waste. There's no one to bag your groceries in stores, and unskilled jobs are rare.
And finally, what is exactly the economic value of having some opinion on geopolitics ? It's not like widespread dancing skills or storytelling skills or ability to quote bible or qu'ran verses is waisted in countries where such people work in mines, stores or construction.

Economic Unit 52255750 said...

I think you might be missing part of the problem here.
For an instantaneous picture of an economy you are right in seeing it as a waste.
Yet three things moderate your position :

1) The economic cost of not working
In a social system like the French one (and most European ones), it is less wasteful for the economy to have highly educated people working even on low-end jobs than not working.

2) The immediate availability of jobs
Even in the most educated and developed countries, there is place for low-end jobs and a finite number of high-end jobs, and those countries tend to produce a surplus of educated people.
Employees unable to find a job suited to their level of education then turn toward less demanding jobs, and tend to compete against uneducated population, increasing inequalities (but making the situation more efficient economically for the above cited reason).

3) Economies are dynamic and workers tend to change jobs
Some highly educated people might take a low-end job due to economic pressure or to continue their studies, but they have the ability, once the economy offers an opportunity, to take on another less wasteful position, also, they are more suited to become entrepreneurs.
Your proposition seems to suggest that once people are built for a job, they would keep it until the end of their service life, which is absurd.
Fortunately, the situation is a little more complicated and "wasted" education is on the long-term an economic opportunity as it allows the immediate availability of educated people when the economy needs it, instead of waiting for the next generation to be educated in response to an economic boom/change.
And as you mentioned, at low-end jobs, education is a great way to increase efficiency.

Also, having opinions is not having an education (of course, having opinions suggests a hint of intellectual curiosity and, for geopolitics, a minimal education in geography and politics, but I doubt these matters are out of reach of US waiters).

Great Zamfir said...

I see a slight inconsistency in your argument. You say the investment banker must be worth her money, because she gets it, and presumably the company could hire someone else. But why not use the same logic for our French waiter? His job must be fitting, or he could go and find another. After all, if a foreign tourist can see he is worth more in 30 seconds, than potential employers must certainly see that in an interview. So either his job is better than you think, perhaps because people value educated waiters more than you, or he is not as smart as you thought he was.

Of course, you can argue that he really should have a better job, but that economic inefficiencies are keeping it from him. But why then assume those inefficiencies are not working at the investment banker level? It is not unreasonable to assume that companies have little choice when hiring Morgan Stanley to raise capital, and therefore pay any price. Or that the same social prejudices that keep our waiter from becoming an investment banker are also protecting investment bankers from competition by smart waiters.

I see another problem with your growth -inequality coupling, at least in this context. Let's assume that somehow the waiter is recognized as investment banker, or geopolitical decision maker, and now earns a top-1% income.

It is not a priori clear that this increases inequality. Sure, by replacing someone else in the top 1%, he made the average income of the top-1% a bit higher. But this displaced person has just increased the average of the second highest income percent, displacing someone who increases the third-highest percent, and so on until the old waiters income level. The net result could just as well be a decrease in inequality.

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