Poverty and Unemployment: Some Estimates for India of the Employment Implications of Income Redistribution

Abstract

The sustained, even rising, levels of poverty and unemployment which have characterised much of the developing world over the past two decades have prompted studies in a variety of countries of the relationship between employment and the distribution of income. These studies have typically followed the pioneering work of the ILO missions led by Dudley Seers to Colombia and Sri Lanka in centring on the potential increases in aggregate employment which might accompany a redistribution of income in favour of the poor. Three separate influences are frequently distinguished. Because of the lower marginal propensity to import of the poor a redistribution of income in their favour brings a net switch of demand towards domestically produced output, with the familiar multiplier effects; in addition the reduced demand for imports for consumption may promote growth indirectly, by easing any balance of payments restriction on development programmes. Similarly, the lower marginal propensity to save of the poor raises income and employment through higher values of the multiplier, although in this case the dynamic effects may be adverse if growth is constrained by an inadequate volume of domestic saving. Thirdly, the dominance in the consumption patterns of the poor of food and ‘simple’ manufactured goods, produced by relatively labour-intensive techniques, results in the creation of more employment per marginal unit of expenditure. On this approach, therefore, the key elements linking employment to the distribution of income are the pattern of consumers’ demand at different income levels and the employment-intensity of the consumption baskets. The balance of evidence from such studies for a number of countries tends to confirm that a redistribution of income in favour of the poor will be associated with an increase in aggregate employment, although the estimated magnitude of the increase is typically small.1