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Symposium 2012

Proposal - Drivers to increased inequality

The Challenge

Inequality has increased substantially in many countries in recent decades. Spectacular gains in the incomes and wealth of the richest fraction of the population often contrast with severe poverty in ...

Inequality has increased substantially in many countries in recent decades. Spectacular gains in the incomes and wealth of the richest fraction of the population often contrast with severe poverty in the same country. Inequality of outcomes often goes hand in hand with inequality of opportunities, as poor people endure various forms of social exclusion, including unequal access to education and health care, high rates of youth unemployment or precarious work and an absence of social recognition.

    • A recent OECD publication, Divided We Stand – Why Inequality Keeps Rising, reveals a number of surprising findings.
    • First, globalisation had little impact on both wage inequality and employment trends. Rapid trade and foreign direct investment integration, including the related increase in import penetration from emerging economies, such as China and India, did generally not increase inequality on either end of the wage distribution. There are exceptions, however: in countries which have weaker employment protection, increased imports from low-income developing countries tended to heighten the domestic wage dispersion.
    • Second, technological progress e.g. in information and communications, has exhibited a bias in favour of high-skill workers and this has been reflected in widening gaps in earnings between high-skilled and low-skilled workers.
    • Third, regulatory reforms and institutional changes increased employment opportunities but, at the same time, contributed to widen wage disparities as more low-paid people are brought into employment. Thus, the increase in part-time employment, in atypical labour contracts and a decline in the coverage of collective-bargaining arrangements in many countries also contributed to disparities in earnings. At the same time, the benefits accruing from the expansion of the most dynamic and innovative sectors are captured mainly by high-skilled workers, and especially by the top earners in certain sectors.
    • Fourth, the rise in the supply of skilled workers provided a sizeable counterweight to offset the increase in wage dispersion associated with technological progress, regulatory reforms and institutional changes. The up skilling of the labour force also had a significant positive impact on employment growth.
    • Fifth, changing family structures also make household incomes more diverse and reduce economies of scale. The Japanese Centre for Economic Research estimates that, by 2030, 23% of all Japanese women up to age 50 will be un-married, compared with 10% today and only 5% two decades ago.
    • Last but not least, the distribution of non-wage incomes has generally also become more unequal. In particular, capital income witnessed a greater increase in inequality than earnings in two-thirds of OECD countries. But at around 7%, the share of capital income in total household income still remains modest on average.
    • It should be taken into account, however, that the evidence we present on the drivers of widening inequality does not work as well for the gains of the top earners (the 1%). For the latter, one has to look to other possible culprits, e.g. The growth of the financial sector, the rise of a " winner-takes-all" culture, cuts in tax rates on high earners, political lobbying by the wealthy, etc.


      Policy Alternatives

        • Rising income inequality creates economic, social and political challenges. It can jeopardise social mobility: intergenerational earnings mobility is low in countries with high inequality such as Italy, the UK and the United States, and higher in the Nordic countries, where income is distributed more evenly. The resulting inequality of opportunities will impact economic performance as a whole. Inequality can also fuel protectionist sentiments.  People will no longer support open trade and free markets if they feel that they are losing out while a small group of winners is getting richer and richer.
        • Tax and benefit policies are the most direct instrument to redistribute income. Overall, cash transfers and income taxes reduce income inequality by one third, and by one quarter among the working-age population. For example, in Brazil, the Bolsa Família programme alone has been credited with reducing poverty by one-sixth.  Generally, Conditional Cash Transfers programmes of this kind are effective in relieving poverty at relatively low fiscal costs. Others have argued that raising the minimum wage also reduces inequality and this is not an uncommon strategy in many countries. However, if pushed too far, it can create distortions in the labour market.
        • Redistribution is not only about cash.
          • Governments also have the leverage of public social services, such as education, health and care services. While the prime objective of such services is not redistribution, they reduce income inequality by a fifth. Public services such as high-quality education furthermore constitute a longer-term social investment to foster upward mobility and create greater equality of opportunities in the long run.
          • Increasing employment contributes to sustainable cuts in income inequality, provided employment gains occur in jobs that offer career prospects. Policies for more and better jobs are more important than ever.
          • Within current tight public budgets, policies to address the causes of growing inequality could be made more efficient, for example, by making more use of in-work benefits which encourage people to take up work and targeting additional income support to low-income households. Such benefits are in place in about half of all OECD countries. They are generally paid to persons in low-earning jobs and are sometimes limited to a transitional period on taking up employment. In-work benefits often play a central role in ‘Making Work Pay’ strategies. Another important policy challenge is to improve access to, and the quality of, education and training which will enable workers to take up better-paid jobs and thus reduce inequality.
          • The new OECD work shows that there is nothing inevitable about growing inequalities. Globalisation and technological changes offer opportunities but also raise challenges that can be tackled with effective and well‑targeted policies. Any policy strategy to reduce the growing divide between rich and poor should rest on three main pillars: more intensive human capital investment; inclusive employment promotion; and well-designed tax/transfer redistribution policies.

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