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The Gini is still in the bottle

The insufficient conclusions and premises of the Gini coefficient.

Early in the 20th century an English writer said “Life is the art of drawing sufficient conclusions from insufficient premises.” Meaning, much of life is about guesswork and while data and numbers are supposed to limit the guesswork in our understanding of society, we can also err with our conclusions and reason.

So while our understanding is vastly improved with social science statistics, too often our conclusions are less than sufficient today, even with better premises.

The Gini coefficient is one of the most misunderstood numbers around today and so are terms such as inequality and poverty. Even the term ‘unemployment rate’ is so full of terms and conditions a second hand car sales man would be proud!

Generally South Africa has a very high unemployment rate and one of the highest (worst) Gini coefficients in the world. This is true, but not in the context most people use it in, making it less helpful in addressing the real social problems in South Africa.

The Gini in South Africa is high! Data from both National Treasury and Stellenbosch University show that pre transfers and taxes and based on income only, the Gini coefficient in South Africa is 0.69. But after social cheques, education and health are taken into account this drops to 0.52.

This still leaves out free electricity and water allocations from local governments and municipalities. According to a KZN university report these free services alone could result in a drop of the Gini coefficient by another 0.04 but as this is a different calculation to the previous one we will exclude it from further discussion at present.

The highly progressive nature of our tax system takes the 0.52 Gini down to 0.47, which would put the South African income distribution to levels close to the United Kingdom and the US.

That gives us the first clue as to the nature of the South African inequality numbers and the actual situation in South Africa. Most of the inequality in South Africa comes from the poorest people not getting enough income. Taking income away from the rich makes much less of a dent. So the first conclusion has to be that the solution is increasing income to the poor.

At this moment many would say that we all agree and we should move on, but as any good doctor would tell you, one conclusion requires a little more investigating before one administers the medicine as we need to find out what this poverty thing is.

PwC South Africa recently calculated a Gini coefficient from people in formal employment at 0.44. A sample of over 1 million people means they had about one sixth of the private formal sector in their calculation.

This 0.44 Gini coefficient is also before taxes and certainly only from work income and would not include social benefits that the lower earners get from education, housing or health.

Speaking to a government researcher was also revealing in that here the estimate was that government employees have a Gini coefficient of less than 0.35 before taxes.

Both these figures reveal something else that is more important, which most public commentators have very little understanding about. Income inequality in South Africa comes mainly from the lack of employment and not from the wage levels or pay gaps in the formal sector.

If we therefore look at the small formal sector in SA it is very likely that the Gini coefficient after taxes and social spending just on the people in this sector, SA would have a Gini coefficient of well below 0.4. I would estimate perhaps even as low as 0.28 which would take us close to that of Germany or Norway, some of the more equal countries around.

But of course we do not live in that world, but the idea here is to show that the pay gap is not the major cause of high inequality in South Africa, but rather the low number of people earning wage income.

The unemployment and wage increases in the formal sector adding to inequality has been confirmed by UCT research, in 1996 research by Leibbrandt, M., Woolard, C. D. and Woolard. I found that the Gini coefficient increased with wage increases, whereas increased remittances and welfare payments resulted in a decline in the Gini coefficient.

Ok so unemployment is the major problem that results in inequality. How the heck do we deal with it?

World Bank data shows South Africa has the 11th lowest male labour participation rate in the world! Only 60% of South African males either want to work or do work. Important to note here too is that with our high unemployment rate the actual male population employed is the third lowest according to International Labour Organisation data. (The reason I am using male employment data is that due to cultural and religious reasons many countries have low female participation rates and male rates give a better “want to work” overview.)

After accounting for unemployed males, less than half of all working age males in South Africa work. Part of the reason is skill levels and that indicates that education must play a big role. Education is also a big driver of earnings. But a question must also be why so few people want to work. The typical high-middle income country has 76% of all males participating in the labour force. That 16% difference can make huge inroads into income inequality – probably more than for example tax increases or making state expenditure more efficient.

The skill levels in South Africa are also not great. About 61% of the labour force is unskilled and it is difficult to find employment for people who do not have the right skill sets. That is also a great reason for unemployment.

Another reason for the high inequality is the huge number of single parent households. The fact that South Africa has the highest percentage of single female headed households in world is clearly a major inequality driver as single parent households are unlikely to have two providers and are clearly more likely to struggle.

So militant labour asking ever increasing wages making employment creation expensive and therefore less likely would actually increase inequality in South Africa as the labour market would struggle to create more jobs!

Yes we are an unequal country. We are more equal when we work – particularly when we have a formal sector job as less than 3 out of ten adults work in the formal sector. So huge wage increases and strikes add to the inequality and by excluding others, the poverty burden the country faces also shifts up.

The right to strike is important for a democracy, but even more important is the responsibility to think not only of us in the formal sector as WE ARE THE HAVES.

It is a serious oversight in a country with so few people in employment and specifically in formal work that people who have jobs – even at minimum wage rates – to think that equality will be better if we pay those in formal sector jobs more!

The poor hear clever advisors say that they are poor and so they ought to fight and strike and get more. In the bigger SA and world picture they are the lucky few and in the higher paid categories of the world today.

Witness what UBS bank reports of earnings and spending around the world have pointed out since the 1970s – SA workers get paid in Purchase Power Parity terms better than people in Athens or Rome. Not New York or London but certainly more than 90% of developing cities when we compare Joburg and quite a few developed ones too.

This false use of the Gini coefficient is a serious mistake and the uninformed give the country the wrong diagnoses and then the solutions prescribed need to be avoided in the art of beating an illness into life. The war on poverty is not going to be won with the wrong strategy.

Remember you can die prescribing flu medication for cholera.

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