Only more state engagement and better policies can lessen inequality

For the past decades in many countries, the state has slowly retreated amidst the belief that by giving more space to market forces there would be greater economic growth and thus greater economic opportunities.

This belief was manifest in the drive to liberalise goods and financial markets in the 1980s and 1990s, and in the decreased investment by the public sector of many advanced economies in public services and goods, as well as in redistributive policies.

Not all countries instituted these changes as wholeheartedly as others, and not all countries originated from the same starting point.

But the overall effect has been rising inequality in most parts of the world: North America, Europe, Asia, and parts of Africa.

Latin America in the 2000s (though not in the 1980s and 1990s) stands as an exception, largely because many countries in the region increased public investment, strengthened minimum wages and instituted redistributive policies during this decade.
Over the past few years, the increase in inequality has become a growing concern amongst policymakers and the public at large.

But while the problem is now recognised, many proposed policy solutions remain the same: improving workers’ skills so that they can better compete in the labour market.

Education is indeed important. But for society as a whole, its ‘inequality-reducing effects’ are limited to increasing the supply of skilled workers, which in a competitive labour market, would ultimately reduce the earnings of the higher-skilled.

If countries want equitable societies with large middle classes, then they need to strengthen or institute a wide range of policies that support job creation, strengthen labour market institutions, and provide social protection to all.

This can only be achieved with a greater role returned to the state.

A new book published by the ILO makes this point. Labour markets, institutions and inequality is based on the contributions of ILO policy experts and analysts who look at how labour market institutions contribute to reducing inequality.

Those institutions include collective bargaining, minimum wages, the type of employment contract and working-time regulation, as well as institutions that redistribute income, such as pensions, income support for the unemployed and the poor, and public social services.

Specifically the book shows how a range of labour and social policy institutions affect workers’ access to the labour market, their earnings and working conditions once employed, as well as the role of social policies in influencing income and providing protection to those who are not working.


Access to the labour market

Policies are needed to promote full employment to ensure opportunities in the labour market.

Lowering labour costs by cutting wages, as recently tried in Greece, will not solve problems of unemployment.

Instead, macroeconomic, trade and investment policies should target job-creation.

In recent decades, the overwhelming focus of macroeconomic policy has been to curtail inflation, with little or no attention given to employment.

Yet central banks, and national development banks where they exist, have a range of policy tools they can use to stir job-creation.

Workers are better able to access these jobs if there are supportive institutions such as the provision of public care services that facilitate women’s ability to enter or remain in paid work.

When care services are not publicly provided, workers either are not able to enter the labour market, or have less flexibility.

Collective bargaining and minimum wages are two institutions that directly affect workers’ earnings, compressing overall wage distribution.

The impact of collective bargaining will depend on whether such agreements are extended to workers who are not members of a union.

Minimum wages are an effective tool for compressing wage distribution in both developed and developing countries.

More than 90 per cent of ILO member states have a minimum wage system in place, and even in developing countries where enforcement mechanisms are weak, minimum wages help to reduce inequality.

Nonetheless there are groups that have been excluded from minimum wage protections, such as domestic workers, and more effort is needed to ensure that coverage is universal and enforced.

The rise in temporary employment contracts and part-time work can contribute to inequality depending on how it is regulated in national markets. Moreover, policies that grant employees the right to switch into and out of part-time work mitigate the risk of these jobs becoming a career trap.

Minimum wages, collective bargaining and policies that protect part-time and temporary workers help increase the earnings of women, youth and migrant workers, calling into question the assumption that labour market regulations hurt these groups.


Redistribution policies

When good quality education, health care, and childcare are publicly provided, lower-income families have more flexibility and better labour market prospects.

It also lessens their need to purchase these services on the market, at a high cost relative to their income, and often of lesser quality.

Social assistance programmes can also lessen workers’ desperation and thus their likelihood of falling victim to forced labour or other forms of exploitative work.

The redistributive potential of social policies is also affected by design, including the mix between public and private forms of protection, and whether there are minimum guarantees for all.

Many developing countries have recently expanded their social assistance programmes – this is a welcome development.

But while there is no “one-size-fits-all” model for reducing inequality, the first starting point is the recognition that market forces on their own will not lead to equitable societies with large middle classes.

There is a need for government intervention, for active social partners that can shape policies.

Thus the need for political will and commitment of all parties to construct and strengthen institutions that can raise earnings at work as well as protect those who are out of the labour market.

Only then can just societies be assured.


An unabridged version of this article was first published on Global Labour Column.