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June 2018, No. 87


Opinion

Poor Employees & Unemployed Poor!

Distribution of income shows the ratio between the poor and the rich in a society and that how much this ratio is acceptable and whether it needs to be improved or not.


According to Dr. Massoud Nili, economic advisor to the IRI president, the poor in Iran are divided into three categories. First, the poor employees who constitute the highest population and their pay should be raised; Second, the unemployed poor for whom jobs must be created through increased economic growth; and ultimately, the invalid and the disabled who can be assisted through government support and by raising the power of welfare organizations. 

Different Definitions of Poverty

As you know, we take poverty as an indicator and considering that part of the society faces difficulty in meeting its needs, this is an approximate definition of poverty. Once we may define poverty as absolute poverty, once we may define it as relative poverty. When we define ‘absolute’ poverty, that is to say part of the society faces difficulty in meeting its basic needs.

For example, how much is the livelihood of a household living in a medium size city or in a big city or in a village. Those whose income is less than this amount, are people who live under absolute poverty. Relative poverty is completely different from absolute poverty.

In this index, independent of whether we are talking about Switzerland or a very backward country, we consider the level of the people’s income in the society and speak about the 25% low-income group who are always experiencing relative poverty. Those who are considered to be below the relative poverty line in Switzerland may be richer than the wealthiest people living in Afghanistan and live in a better environment than them. But in their own society they may be ranked among the poor. In fact, relative poverty always exists, but absolute poverty can be eliminated and no more exist in any country at all.

Another classification is that we recognize a kind of poverty as income poverty, and consider another type multi-dimensional poverty. Income poverty means how much a person earns and how much his income would generate the standard of living in return for the goods and services he needs.

Multidimensional poverty is made up of several factors that constitute poor people’s experience of deprivation – such as poor health, lack of education, inadequate living standard, and lack of income.

We might say that a country is not in a favorable situation in terms of income poverty, but enjoy favorable conditions in terms of multidimensional poverty.

Another classification is that considering these points, especially with the income poverty base, what groups are poor, who are poorer? Are the youth poorer or the retired? Are the employed poorer or the jobless? 

Poor Employees

A family that has the smallest expense in one month or one year is the poorest and a family with the highest expenses is the most affluent household. Then we divide these into equal populations. Therefore, 10% of the population with the lowest level of education is the first decile, then comes the second decile and goes on till the 10th decile. Now we analyze in terms of welfare to see what are features of the poor in society and what are the characteristics of the rich. The first point we get from this study is that the vast majority of Iran’s poor come from the working class. In Iran, there are about three million unemployed people.


As soon as you have put aside the gap between the two ends of income distribution, Iran would become one of the most equitable countries in the world.


When we distribute this number (three million) among the various deciles, we come across 4% for the first decile; for the second decile it is 3% and this goes to 2% and 1% in the higher income deciles. Here about 35% to 38% of our first decile who constitute the low-income population of the community are from the employed. This is an instructive observation for us that if most of our poor are among the employed, then we must primarily improve their level of income. Of course, those who are unemployed should find jobs. But in terms of the population, most of our poor come from employed. Some eight million people (38%) in the country have jobs but they do not enjoy good quality.

So the question immediately raised is whether we can categorize poverty in the country according to the characteristics of the poor? The answer is yes we can do it. Well, what’s this category? We say that we have three types of poverty in the country: one is the poverty of the employed, namely those who are employed but poor; second, the unemployed who are poor; and third the poverty of those who cannot work due to physical and mental failures. As for the first group, this could happen for two reasons: either the work environment is not fair, or the job generates low income. Its own income is low. In industry, we have big, medium, small and micro enterprises. An enterprise having 10 to 49 employees (that is under 50) is small enterprise; one with 50 to 150 people -- and according to some definitions up to 200 employees – is medium-sized enterprise. Enterprises with over 200 employees are big enterprises. Enterprises employing fewer than 10 people are called micro enterprises. Our problem is that 65% to 70% of all employment in the industry sector is in micro enterprises. The least employment occurs in large enterprises. Now, in terms of revenue, about 70% of the income generated in our industry is in large enterprises. So the income from the micro sector is very little which is divided into a very large figure as the number of employees. We conclude that income is generated in one part of the economic activity, but employment is elsewhere. So increasing employment does not necessarily lead to an increase in income.

The fact that one is employed does not mean that he does not suffer from poverty.

In fact because of this gap between the part where income is generated and the part where job is created, many of our employees live in poverty, and the gap between the incomes of our employees is too big. The solution is to turn the micro enterprise into a small enterprise in a process of growth; turn the small enterprise into a medium enterprise; and turn a medium enterprise into a large enterprise. But why this does not happen in our economy? The reason is that the big enterprises in our economy were not micro enterprises to grow up gradually. They were created big from the very start. The result is that there is no connection between enterprises of different sizes, which results in the flow of income from large firms to small, medium and micro enterprises…

This major group, the large one, means that employees must increase their income level in the economy with higher economic growth, so they also have more income. So there is no dispute between growth and social justice. 

Income Ratio in Iran

Distribution of income shows the ratio between the poor and the rich in a society and that how much this ratio is acceptable and whether it needs to be improved or not. Distribution of income in the Iranian economy has a rather specific shape. If we arrange the first to the tenth deciles from the lowest to the highest, this division can also be more detailed.

For example, let’s get a percentile; there, instead of every batch of eight million there will be a batch or percentile of 800 thousand. In fact, 800,000 people with the lowest income will be the first percentile and this will continue up to the hundredth percentile. Now, if we find out the difference in the level of enjoyment of each percentile with its neighbors and if we continue the trend to the first percentile, which is actually the lowest income, we will reach a very interesting U form. This means that the difference in income level and welfare level of the very poor part of the society and the very rich part of the society is very high, and the middle part which covers about 62 to 65 million people in the country, have a very low level of difference in income.

Therefore, we observe inequality in the income distribution spectrum between the very rich and the very poor. That’s why, when we divide these two sides, if we regard deciles the ratio will approximately stand 14 to 1. That means the tenth decile is 14 times more than the first decile of income owner. The ratio of 14 to 1, for our country, in comparison to other countries, is not acceptable. For example, if you compare the United States with Europe, the result is that the US is more unequal. That is, Europe actually has a stronger social policy while there is more inequality in the United States. This ratio of 14 to 1 is closer to the US than Europe. That is, despite the fact that we have placed so much emphasis on social justice, this gap is unacceptable.

As soon as you have put aside the gap between the two ends of income distribution, Iran would become one of the most equitable countries in the world. This shows that the issue of inequality in Iran has a special shape. In the past two or three years, you’ve heard a lot about the issue of cash subsidies; questions such as why the government decided to hand out subsidies to all the people; let’s pay subsidies to some and eliminate others from the list.

These levels of income in the middle deciles are so close with one another  which if you remove the cash subsidy of 455,000 rials from this group and give it to the next group which is now poorer, it would become richer. That is, the deciles change seats which could result in major social disruptions and so on.

One solution for our tax system is to move towards redistributive taxes rather than income tax. It should get taxes from the high-income class and pay it to the low-income class.

 

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  June 2018
No. 87