Rising wage inequality in Pakistan

Are average real wages in Pakistan rising, falling or stagnating? Some analysts believe that they have increased in the post-Musharraf era until 2018, but suffered from a decline in the following two years. This analysis is deceptive because average real wage gains or losses mask unequal spread across workers.

Real wages are true indicators of purchasing power and living standards for a vast majority of people. Living standards are often measured by trend in real wages, which measure change in nominal wages adjusted for inflation. Current wage distribution in Pakistan is far more unequal than in 1991. Our analysis of data from various rounds of the Labor Force Survey (LFS) of Pakistan suggests that wage inequality (measured by the Gini index) has increased by 6 percentage points, from 35% in 1991 to 41% in 2018. However, growth in wages of upper and lower quintiles can throw more light.

We have shown in a recent study for Oxfam G-B that labour income share of the top quintiles of workers is gradually going up and of the bottom quintiles, is going down. Between 1991 and 2018, the share of the top 1%, 5% and 10% of workers has increased by 167%, 53% and 33%, respectively. At the same time, the share in labour income at the bottom 20th percentile has fallen by 25%. And there are genuine questions about what explains this rising earnings’ inequality.

Might the wage inequality be explained by an abnormal gap in returns to skills of the more educated versus less educated? In recent decades, the economic payoff to post-secondary or college education has steadily increased relative to secondary and below secondary education. Due to globalisation, information technology (IT) revolution, automation and e-commerce taking centre stage, there has been a gradual decline in employment opportunities for the least skilled workers who were more at risk as their jobs were easily automated. Job opportunities for administrative support staff, clerical jobs and a variety of less skilled jobs in manufacturing, services and agriculture sectors have steadily gone down.

The interplay between the demand and supply of skills has played a key role in determining premiums at the market place. A modern-day economy needs an educated and trained workforce to develop innovative ideas, efficiently manage establishments, provide effective education and healthcare, run financial institutions, compete globally for market share, develop infrastructure and provide effective government services. For these growing occupations, post-secondary education has increasingly become crucial. Since 1980s, there has been a steady increase in the number of colleges and universities in the country, which has played a key role in robustly supplying multiple cohorts of college-educated men and women to the labour market. The increased supply of college educated workers has led to far greater job competition in the labour market, eventually producing a crowding out effect, as the employers always prefer more educated to less educated workers.

The rising skill premium of college education was not the only cause of growing wage inequality. At least, two other causes were also into play at the same time. Firstly, frequent episodes of high inflation have served as a highly regressive tax that has affected real wages of low-income unskilled workers more severely than high-income workers. Secondly, less than 3% of the workforce in the country is unionised while the declining bargaining position of the labour unions and increased role of contractors in supplying labour to establishments has also served as a blow to the growth in earnings of less skilled workers.

Notably, there has been a significant increase in the returns to skills of college graduates versus non-college graduates. Our research shows that real wage gap between male college graduates and non-college graduates has increased from Rs9,600 in 1991 to Rs156,000 in 2018 (in constant 2015-16 prices), which is almost sixteen times the 1991 level. A comparable trend for female workers reveals that real wage gap has increased from Rs14,400 in 1991 to Rs192,000 in 2018, or nearly thirteen times the 1991 level.

This brings me to the current state of the trend of real wages. Eminent economist Dr Hafiz Pasha has recently argued that “the period from 2008-09 to 2017-18 has been relatively good for employed workers” because “they have seen an average annual increase in real wages of over 3%.” Dr Pasha has further noted that between 2009 and 2013, average annual increase in real wage was over 2%, which increased to more than 4% during the period from 2013 to 2018. But while these numbers are overwhelming, we should be circumspect in the conclusions we draw from them.

First, evidence compiled by us from LFS reveals that between 2008 and 2018, the real wage gap between college graduates and non-college graduates has increased at an annual average rate of 14% for male and 26% for female workers, indicating unequal wage growth. It can be attributed to rising wage premiums of post-secondary education and stagnant or sticky real wages of non-college graduates. Accordingly, increased real wages offer good news for educated workers, but extraordinary bad news for less educated and less skilled workers.

This is further corroborated by the rising wage gap in annual median wages of more educated versus less educated workers, in constant 2015-16 prices. We find that between 1991 and 2018, the gains to investment in a bachelor’s degree or above have increased by 45% relative to primary education, 51% relative to middle education, 68% relative to matric and 38% relative to higher secondary education. The wage differential between higher and lower levels of education is most consequential in the rising levels of wage inequality and living standards.

Have real wages increased or decreased in the post-2018 period? Unless data of a new LFS becomes available, commenting on this would be a mere speculation. It makes no sense to use real wages of construction workers (from the Sensitive Price Index) to epitomise average annual wage growth since their real wages are stagnant and payoff to more educated workers is on the rise. Thus, the average wage growth may be on the up.

There is no quick fix to the rising wage inequality in Pakistan. In the long run, policies that help improve the quality of human capital by investments in primary through secondary education can be most effective.

Published in The Express Tribune, June 29^th, 2021.

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