Income inequality stunts NZ growth - OECD

The increase in New Zealand income inequality since the mid-1980s has been among the largest in the OECD. Photo / Michael Craig

The New Zealand economy would have been 10 per cent larger in 2010 were it not for the steep rise in income inequality which occurred between the late 1980s and mid-1990s, OECD economists have found.

Drawing on data from across the OECD over the past 30 years their econometric analysis finds that income inequality has a negative and statistically significant impact on subsequent growth.

"In particular what matters most is the gap between low-income households and the rest of the population."

The impact on education and skills is especially damaging.

"In contrast no evidence is found that those with high incomes pulling away from the rest of the population harms growth."

The findings echo those of International Monetary Fund economists earlier this year who found that "lower net inequality [that is, after tax and transfers] is robustly correlated with faster and more durable growth."

The measure of income inequality the OECD economists use, the Gini co-efficient, rose steeply between the late-1980s and the mid-1990s. Since then it has wobbled around a fairly flat trend line. Even so, the increase in New Zealand income inequality by that measure since the mid-1980s has been among the largest in the OECD.

The OECD economists have estimated the impact on gross domestic product growth of the changes in inequality between 1985 and 2005 by comparing actual GDP growth recorded between 1990 and 2010 with what they estimate it would have been if inequality had not changed, and holding all other variables constant.

"Rising inequality is estimated to have knocked more than 10 percentage points off growth in Mexico and New Zealand," they say.

"In the United States, the United Kingdom, Sweden, Finland and Norway, the growth rate would have been more than one fifth higher had income disparities not widened. On the other hand, greater equality helped increase GDP per capita in Spain, France and Ireland prior to the [global financial] crisis."

They found that that inequality's negative effect on growth holds not only when they focus on the poorest 10 per cent households and the gap between their incomes and the average, but for the second, third and fourth income deciles as well -- the lower-middle class.

And like their IMF counterparts they find that " redistributive policies achieving greater equality in disposable income have no adverse growth consequences."

They conclude that "focusing exclusively on growth and assuming that its benefits will automatically trickle down to the different segments of the population may undermine growth in the long run inasmuch as inequality actually increases."

On the other hand policies which help limit -- or ideally reverse-- the long-run rise in inequality would not only make societies less unfair, but also richer.

Read the full OECD global income inequality report here: