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Income and Employment Inequalities in Iran

Majlis va Pazhouhesh [Majlis and Research];
The Publication of The Islamic Consultative Assembly
Apr. & May 1997, No. 22, Vol. 4
By: Dr. Soheyla Parvin

Summary: The inequalities of income distribution in Iran are such that the consumption share of the one percent high income group of the society is nearly 1.4 times as many as that of the 20 percent poor class of the society.

The taxation policies have had almost no balanced impact on the distribution of incomes in Iran, but rather due to taxation structure and reliance on easy to collect taxes, these policies have had counter balance impacts on the income distribution.

Based on the information on the 1986 public census on population, the number of deprived families has been estimated at 2.5 million.

Of course, this figure will rise to 4.6 million families when other indicators such as housing are taken into account.

The economic factors which lead to the unequal distribution of incomes, unemployment and poverty in Iran can be studied separately.

The existing indicators offer a picture of widely unequal distribution of incomes (and expenses).

The magnitude of this inequality is such that the consumption share of the one percent high income group of the society is nearly 1.4 times as many as that of the 20 percent poor class. This is while, the adoption of protective policies in recent decades has balanced to a large extent this inequality.

No doubt, had those protective policies not been adopted, the continuation of the trend would have been very dangerous.

The Gini coefficient (1) in urban areas (in the year 1989) estimates inequality of income distribution at over 0.48 percent. This indicates that one of the features of the Iranian economy is the inequality of income distribution which if goes unchecked would lead to widespread poverty.

Statistical surveys about Iran show that the major part of incomes is concentrated on the trade and services sectors. This is a feature shared by most countries which have based their development process on endogenous incomes (such as oil).

These considerations cast doubt over the idea that the maximum growth of production can ease inequalities and widespread poverty in Iran. Nevertheless, there are some people who still believe that by increasing production and development activities without paying attention to the various aspects of distribution, the country will be able to reduce poverty and administer social justice in the future.

These ideas stem from theories of some economists who believe that inequality of income distribution is a prerequisite for economic growth because the incomes of the rich provide conditions necessary for savings that is the basis of capital formation.

Since nearly all revenues of the low income group are spent on consumption, the economic growth remains dependent on the savings of the rich.

Based on this idea, there is an argument that any economic system based on more disparities in distribution of incomes grow at more rapid pace than an economic system that relies on fair distribution of incomes and that in later stages of economic development, fair distribution of incomes can be achieved.

There is no doubt that this can be attained only when the elasticity of substitution between capital and labor is less than a unit and economic growth is coupled with an increase in the capital.

It is only through this manner that the productivity of labor engaged in production sector will gradually increase and the concentration of incomes will eventually decrease in the course of the time. However, this feature does not exist in the economy of many countries including Iran.

Studies about Iran indicate that inflation deteriorates inequality of income distribution. In views of many development theoreticians, inequality is inherent in the process of development and this inequality increases the possibility that in countries in which there exist an unjust distribution of incomes and which are dependent on external resources, the benefits of growth may be distributed unequally during their development process.

Under such conditions, financial policies are usually taken into consideration as one of the most important instruments for balancing the distribution of incomes (and consumption).

The role of these policies in balancing tax structure as well as a comparison between rates of tax levied on various groups will be explained later.

The weak role of tax revenues in the economy of the country that stems mainly from the existence of oil revenues will be discussed.

The impacts of taxes on the distribution of incomes have been estimated in eight tax paying groups of people from all walks of life.

A comparison of Gini coefficients and the share of incomes for various classes of society before and after paying taxes, indicate that tax policies have had almost no balanced effects on the distribution of incomes in Iran, but on the contrary, due to tax structure, reliance on easy to collect taxes and an inefficient tax collection system, these policies have had counter balance effects to an extent that in 1989, the 10 percent low income group paid 6.4 percent and the 10 percent high income group paid 5.7 percent of their incomes in taxes.

What was mentioned above shows which factors have been behind inequality of incomes in Iran and which factors (like taxes) are unable to tackle this problem.

Let's review the effects of inequality of the process of development in Iran. Acute inequality of income distribution and its pursuant widespread poverty can be regarded as an impediment to economic growth from two aspects.

No doubt, unequal distribution of incomes, by restricting demands and affecting production, will affect market structure. Diversity of demands by a small group of high income people and reduction in demands by a large group of the low income people, will serve to change the production structure, depriving the manufacturing sector of the benefits of mass production. On the other hand, given the large extent of poverty and unequal distribution of incomes, the productivity of a large portion of the work force will decline and this in turn will limit the long term growth of production.

A point worth mentioning is that the country should be sensitive to the status of work force and to its productivity particularly in training innovative man power.

Almost all the developed countries in one stage of their development, have cited lack of efficient work force as their second most important problem after financial sources. The success of these countries have been tied to developing innovative ideas.

Providing the man power needed for development requires pre-calculated investments and meeting the basic needs of men as the first step. It is clear that the large scale of poverty will delay development in later stages. Moreover, the motive for production partly stems from demands which cannot be achieved without planning to curb poverty. The lack of demands by the large portion of population will not make mass production possible. The following is a picture of the status of incomes in Iran:

The information offered by the 1986 public census on population, even on the most optimistic view, puts the number of deprived families at 2.5 million (3). When other indexes are taken into account, this figure is much higher. According to the housing index, over 4.6 million families (comprising 21 million people) live in two or less than two rooms.

Based on the information on family budget, 30 percent of the total families, or three million families, have had a per capita food expenditure of less than 160 rials per day. According to nutrition standards, 3.5 million families (comprising 14.2 million people) have consumed below consumption level. As for calorie consumption on a daily basis, only ten percent of families have received the minimum level of calories. Most of calories consumed were provided by bread and grains (2).

Taking into consideration a minimum level for expenditures in urban areas, the incomes of nearly 88 percent of families living in urban areas have been below this level. Considering the economic recession and a drop in production in recent years (the criteria for per capita income), over 46 percent of families living in urban areas had an income less than 50 percent of the per capita income. This is while the average per capita consumption of the high income group has been 18 times as many as that of a person from the ten percent poor group. The consumption share of the 20 percent high income group stands at 49.9 percent. In other words, the share of the remaining 80 percent of families is equal to that of the 20 percent high income families.

This wide inequality in the distribution of consumption is observed at a time that as a result of protection policies adopted by the government (such as state-controlled distribution) and restrictions imposed on the consumption of the high income group, consumption has been balanced to a large degree. But evidences show that the distribution of incomes is much more unequal than distribution of consumption.

The dimensions of poverty and deprivation which have been explained according to various criteria focused more on the fact that incomes were not enough to meet the basic living expenses.

There were other kinds of deprivation coupled with insufficient revenues. The information provided by the 1986 public census on population, on the elderly families, families without bread winners, one member families or families with handicapped members, reveals the large scale of deprivation and deprived people whose survival depends on the expansion of the social security systems. At the same time, the assistance offered by the governmental and non-governmental organizations in charge of protecting this group seems very scant compared to the real needs of these families.

For example, the Imam Khomeini Relief Committee has brought nearly 2.6 million people under its protection in various forms (permanently and temporarily) since 1990. Of this figure, there are only 505,000 elderly families aged over 60 living in rural areas.

These families comprise 1.4 million people including their financially dependents. Despite the successful efforts of the Committee in identifying and protecting the needy families, the average daily aid (in cash and in kind), given by the Committee to every person has been 42 rials. However, in every society, a percentage of people are deprived of earning incomes for various reasons or have been retired after playing their role in the manufacturing sector, and therefore they should be covered by retirement and social security systems. But in Iran, the lack of a successful social security system has caused this group of society not to be able to make both ends meet without taking on a second or third job.

In 1986, only 3.5 percent of the over 60 year old population were covered by the retirement fund of the Social Security Organization.

As mentioned above, in the Iranian economy, inflation strongly counter balances the family expenses and in the event of structural changes and adjustment, increase in inflation would be inevitable.

For the low income class of the society who are engaged more in the unorganized labor sector, the possibility of increasing incomes and coping with rising expenditures (particularly for foodstuff) is very limited. Therefore, distribution becomes more unequal under inflationary conditions particularly in a country where the five percent rich families account for 20 percent of the total consumption.

The following is a short account of Iran's status in terms of employment and per capita production which if not improved would lead to poverty.

The per capita employment of the country in recent years shows a decrease of 33 percent compared to 1974. This picture coupled with the decline in the country's foreign exchange incomes in the 1974-1989 period, reveals other problems such as relative reduction of capital formation, rise in unemployment and finally spread of poverty.

The share of capital formation in the gross domestic product (GDP) was less than 16 percent in 1989. Despite the fact the ratio has assumed an upward trend since 1988, the changes are very small, and the share of capital formation in the GDP has reached it record low in the past 30 years.

According to the 1986 public census and national accounts, 33 percent of the country's employed population of 15 million people have no role in the national production and are in fact among the invisible unemployed. With regards to the work force of 12.8 million people, over 47 percent are either unemployed or invisible unemployed. The per capita output of the work force has dropped by 33 percent on the average during the 1976-1986.

Despite great attention paid to the industry and mine sector, the sector has provided employment opportunities for only 11.3 percent of the whole work force. While the visible unemployed constitutes over 14 percent of the work force, in a not too far future the active population of the country will amount to 32 million people, and in order to absorb the additional work force, at least 18 million employment opportunities should be provided. This means creation of 850,000 new jobs per year.

In order to completely eliminate unemployment, it is necessary that nearly 900,000 new employment opportunities be provided every year. This is while that over the ten year period between 1978 and 1988, the Iranian economy has created only 160,000 new jobs on the average per year (4). Furthermore, the growth of the industry sector was not so high that it could absorb the surplus work force of the agriculture sector in order to pave the way for the latter to develop.

Most of the profits made by the industry sector returned to the same sector and we could not make as much use of this sector as we could for development of other sectors such as agriculture. For instance, our investments in the agricultural processing industries were scant and unimportant compared to the investments made in other sectors.

On the other hand, the policies enforced in the industry sector deteriorated the unemployment problem. The lack of a definite and clear planning concerning the choice of proper technology on the part of policy makers led to widespread centralization, employment with low productivity, lack of dynamism and low technological efficiency. In addition, the government's industrial credit policies created stumbling blocks for small and medium sized industries. It was assumed that the rapid growth rate in the modern industrial sector would be enough to absorb the work force, but the high rate of employment and immigration of rural people to cities belied this assumption.

Conclusion

The realities, figures and statistics concerning the distribution of incomes, per capita production and employment were outlined above. Nevertheless, as for the poverty line in Iran, since no expert work and statistical survey has been carried out in this regard so far, we have to make some speculations.

According to an expert view, a large number of people have been placed below the poverty line in Iran since the victory of the Islamic Revolution while another expert view held by certain organizations, claims that the number of people living below the poverty line has drastically reduced since 1979. Of course, there is an undeniable fact that the rapid spread of poverty during the post-revolution era has been checked to a large degree by the protective policies adopted by the government.

However, determining the exact number of people living below the poverty line requires a comprehensive expert-statistical work which apparently has not been taken seriously. It is necessary that this important job be done if the country really wants to eliminate poverty.

Footnotes

1- Gini is used as an index showing the way incomes are distributed. It is between zero and one. When the index is zero, it means that the distribution of incomes is perfect and when the index is one it shows the existence of completely unequal distribution of incomes in the economy.

2- Includes families without employed members, 80 percent of families having over 65 year old employed members, 50 percent of public sector employees whose incomes are below the poverty line. It is to be noted that 80 percent of the public sector employees have had below the poverty line incomes.

3- Statistics Center of Iran, "A Survey of Nutrition and Calorie in Iran", Statistical and Computational Statistics Directorate, 1972-1989

4- Because of unbalanced investments, we have not gained the required successes that are prerequisite for elimination of poverty, during the First Development Plan. For example, most efforts made in the First Plan were directed towards protecting the industry sector while the ability of the sector to create new jobs did not at all tally with the volume of investments made in it.