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The Organisation for Economic Cooperation and Development (OECD) finds that income inequality not only has just social and political implications but also economic ones. In the United States, between 2008 and 2013, real average household disposable income of the top 10% income earners rose 10.6%, while in the bottom 10% it fell 3.2%. The average income of the top 10% in America was 19 times higher than the bottom 10% in 2013.
"Put simply: rising inequality is bad for long-term growth," the Paris-based OECD concluded in its report.
The fact that the bottom 10% fared worse than other income groups during the later years of the crisis is particularly worrying as it exacerbates a long-term trend. Focusing on 11 countries for which long-term data are available, Figure 3.5 shows that, in the last 25 years, incomes for the bottom 10% increased much less than the rest as they grew less during expansions and fell more during recessions.[Editor's Note: The following May 21, 2015 press release comes from the organization that started out as the Organisation for European Economic Cooperation (OEEC) established in 1948 to run the Marshall Plan for reconstruction of a Europe after World War 2. The website for the Press release http://www.oecd.org/social/reducing-gender-gaps-and-poor-job-quality-essential-to-tackle-growing-inequality.htm ]
“The gap between rich and poor keeps widening. Growth, if any, has disproportionally benefited higher income groups while lower income households have been left behind. This long-run increase in income inequality not only raises social and political concerns, but also economic ones. It tends to drag down GDP growth, due to the rising distance of the lower 40% from the rest of society. Lower income people have been prevented from realising their human capital potential, which is bad for the economy as a whole.”
Higher inequality drags down economic growth and harms opportunities (Executive Summary, p. 15)
Beyond its impact on social cohesion, growing inequality is harmful for long-term economic growth. The rise of income inequality between 1985 and 2005, for example, is estimated to have knocked 4.7 percentage points off cumulative growth between 1990 and 2010, on average across OECD countries for which long time series are available. The key driver is the growing gap between lower-income households – the bottom 40% of the distribution – and the rest of the population.
A main transmission mechanism between inequality and growth is human-capital investment. While there is always a gap in education outcomes across individuals with different socio-economic backgrounds, the gap widens in high-inequality countries as people in disadvantaged households struggle to access quality education. This implies large amounts of wasted potential and lower social mobility.
Improving job quality and reducing gender gaps are essential to tackling growing inequality (Press Release)
21/05/2015 - Income inequality has reached record highs in most OECD countries and remains at even higher levels in many emerging economies. The richest 10 per cent of the population in the OECD now earn 9.6 times the income of the poorest 10 per cent, up from 7:1 in the 1980s and 9:1 in the 2000s, according to a new OECD report. In It Together: Why Less Inequality Benefits All also shows that wealth is even more concentrated at the top than income, exacerbating the overall disadvantage of low-income households. In 2012, the bottom 40% owned only 3% of total household wealth in the 18 OECD countries with comparable data. By contrast, the top 10% controlled half of all total household wealth and the wealthiest 1% owned 18%.
“We have reached a tipping point. Inequality in OECD countries is at its highest since records began,” said OECD Secretary-General Angel Gurría, launching the report in Paris with Marianne Thyssen, European Commissioner for Employment, Social Affairs, Skills and Labour Mobility. “The evidence shows that high inequality is bad for growth. The case for policy action is as much economic as social. By not addressing inequality, governments are cutting into the social fabric of their countries and hurting their long-term economic growth."
The report highlights the need to address working conditions. The increasing share of people working part-time, on temporary contracts or self-employed is one important driver of growing inequality. Between 1995 and 2013, more than 50 per cent of all jobs created in OECD countries fell into these categories. Low-skilled temporary workers, in particular, have much lower and instable earnings than permanent workers.
Youth are most affected: 40% are in non-standard work and about half of all temporary workers are under 30. They are also less likely to move from a temporary job into a stable permanent one.
Another key lesson from the report is that more needs to be done to reduce the gender gap. The increase in the number of women working has helped stem the rise in inequality, despite their being about 16% less likely to be in paid work and earn about 15% less than men. If the proportion of households with working women had remained at levels of 20 to 25 years ago, income inequality would have increased by almost 1 Gini point more on average.
Beyond its impact on social cohesion, the report stresses that growing inequality and weak opportunities in the labour market are harmful for long-term economic growth. The rise in inequality between 1985 and 2005 in 19 OECD countries analysed is estimated to have knocked 4.7 percentage points off cumulative growth between 1990 and 2010. In fact, it is inequality affecting the bottom 40% which mainly brings down overall growth. As inequality rises, families with lower socio-economic background experience significant falls in educational attainment and skills, implying large amounts of wasted potential and lower social mobility.
Inequality is highest among OECD countries in Chile, Mexico, Turkey, the United States and Israel and lowest in Denmark, Slovenia, Slovak Republic and Norway. Inequality is even higher in major emerging economies although it has fallen in many including Brazil.
To reduce inequality and boost inclusive growth, the OECD says governments should: promote gender equality in employment; broaden access to better jobs; and encourage greater investment in education and skills throughout working life.
Redistribution via taxes and transfers is also an effective way to reduce inequality. In recent decades, the effectiveness of redistribution mechanisms has been weakened in many countries. To address this, policies need to ensure that wealthier individuals, but also multinational firms, pay their share of the tax burden.
Figure 1.2 While the flashy lifestyles and incomes of the top 1% are certainly eye-catching, focusing on them exclusively risks obscuring another area of growing concern in inequality – namely the declining situation of low-income households. This is not a small group. In recent decades, as much as 40% of the population at the lower end of the distribution has benefited little from economic growth in many countries. In some cases, low earners have even seen their incomes fall in real terms (Figure 1.2). Just as with the rise of the 1%, the decline of the 40% raises social and political questions. When such a large group in the population gains so little from economic growth, the social fabric frays and trust in institutions is weakened.
Figure 3.5. The fact that the bottom 10% fared worse than other income groups during the later years of the crisis is particularly worrying as it exacerbates a long-term trend. Focusing on 11 countries for which long-term data are available, Figure 3.5 shows that, in the last 25 years, incomes for the bottom 10% increased much less than the rest as they grew less during expansions and fell more during recessions.
