OECD points finger at rising inequality

One of the main ways inequality retards growth, the OECD argues, is through its effect on a population's educational opportunities. Photo / Thinkstock

Growing gap between rich and poor drags economic growth lower - report.

Income inequality is a drag on economic growth, say researchers at the Organisation for Economic Co-operation and Development after examining the experience of the rich countries' club over the past 30 years.

In a report released last week, entitled "In It Together", the OECD team concludes that "beyond its serious impact on social cohesion, high and often growing inequality raises major economic concerns, not just for the low earners themselves but for the wider health and sustainability of our economies. Put simply: rising inequality is bad for long-term growth".

A standard measure of inequality is the Gini coefficient.

"Between 1985 and 2005, for example, inequality rose by more than two Gini points on average across 19 OECD countries, an increase estimated to have knocked 4.7 percentage points off cumulative growth between 1990 and 2010," the OECD says.

In New Zealand the increase in income inequality was more than six Gini points and occurred between the mid-80s and mid-90s, according to the Ministry of Social Development's authoritative reports on incomes.

The OECD's analysis found that while the pace at which those at the top of the income scale are pulling ahead of the average matters, the bigger effect on growth is the rate at which those on lower incomes are falling behind.

"The biggest factor for the impact of inequality on growth is the growing gap between lower income households and the rest of the population.

"This is true not just for the very lowest earners, the bottom 10 per cent, but for a much broader swathe of low earners - the bottom 40 per cent," it said.

"Countering the negative effect of inequality on growth is thus not just about tackling poverty but about addressing low incomes more broadly."

One of the main ways inequality retards growth, the OECD argues, is through its effect on a population's educational opportunities.

"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," it says.

"This implies large amounts of wasted potential and lower social mobility. A focus on the early years, as well as on the needs of families with school children, is crucial in addressing socio-economic differences in education."

The OECD researchers point to the rise of "non-standard work" - temporary and part-time jobs and self-employment, which now account for about a third of employment in OECD countries, and for about 60 per cent of the employment growth since the mid-90s.

Many non-standard workers are worse off in many aspects of job quality such as earnings, job security or access to training, they say.

They point to a hollowing out of the middle of the workforce, both in terms of skills and incomes, and increases in the proportion of workers in high and low-skill jobs.

At the same time policy changes to tax and benefit systems have reduced redistribution in many countries, as working-age benefits failed to keep pace with wages, and taxes became less progressive.

The OECD analysis also found that efforts to reduce inequality through redistribution do not lead to slower growth, confirming similar findings by International Monetary Fund economists published last year.

"This suggests that redistribution can be part of the solution, but requires a serious discussion on how to promote effective and well-targeted measures that promote a better sharing of the growth outcomes not only for social, but also for economic considerations."

Government transfers have an important role to play in guaranteeing that low-income households do not fall further back in income distribution, but they need to be paired with measures to re-establish self-sufficiency, prevent long-term benefit dependence, and support families' capacities to compensate earnings losses, the OECD says.

Policies also need to ensure wealthier individuals and multinational firms pay their fair share of the tax burden.

"Broadening the tax base by closing loopholes in the current tax code has the potential to promote both efficiency and equity.

"This is particularly the case for taxation of capital income, which is highly concentrated among wealthy households and represents a significant fraction of their total income.

"The unequal tax treatment of income from different asset classes increases inequality in some cases and distorts the allocation of capital."

It says capital gains on bequeathed assets should be taxed.

"From the perspective of intergenerational social mobility, taxing inheritances is preferable to taxing estates since what matters is how much a person receives from others, not how much a person leaves to others."

Income spread

• When New Zealand households are ranked by income the top 10 per cent account for 26 per cent of disposable income. The poorest 40 per cent of households get 20 per cent between them.

• Across the OECD, in the 1980s the richest 10 per cent of the population earned seven times more than the poorest 10 per cent. Today they earn nearly 10 times more.

• Rising inequality cut economic growth by a cumulative 4.7 percentage points in the 20 years to 2010, the OECD concludes. In New Zealand, inequality rose three times as fast.