Income inequality is on the rise, undermining economic growth and overall well being, says the Organization for Economic Co-operation and Development (OECD).
In a new report, the Paris-based OECD suggests that countries should make growth socially inclusive in a bid to bolster growth. However, it also says that policies designed to tackle the widening gap between rich and poor “will only succeed if they also look beyond income and address better access to high-quality education, health care and public infrastructure.”
The report finds that the wealthy have overwhelmingly captured the benefits of economic growth over the past 25 years. It says that the average income of the richest 10% of the population in OECD countries was nine and a half times higher than that of the poorest 10% in 2010, up from seven times higher 25 years ago.
In Canada, the richest 1% captured 37% of income growth between 1976 and 2007, the report says. In the U.S, the divergence was even more extreme, with the 1% taking 47% of income gains, compared with about 20% for Australia and Britain. And, it says this gap between rich and poor has widened even faster since the financial crisis.
At the same time, the middle class is also seeing its share of income decrease. The report says that the share accruing to the three middle quintiles of the income distribution (ranging from the 20% to the 80% poorest households), has fallen over time in some countries, including in Canada, Austria, Australia, Denmark, France and the U.S.
And, the report also details links between income, education and health. It says that data from 14 OECD countries show that at the age of 30, people with the highest education levels could expect to live on average six years longer than their poorly educated peers.
“Inequality undermines societies and damages economies,” said OECD secretary-general Angel Gurría. “It is not enough to put in place policies that harness growth, we must also ensure that the benefits of growth are shared by everyone. This is one of the most pressing challenges we face today.”
The OECD sets out a framework for action in the report, which it says forms part on an OECD-wide effort to develop an inclusive agenda for growth. It says economic and social policies should be designed to foster both equity and growth. Investing in skills and education, for example, can have far-reaching impact on these twin objectives, it notes.
Additionally, it stresses that local government has a key role to play, particularly by investing in quality housing, public transport and in providing training for disadvantaged groups. And, the report argues that promoting inclusive growth can also help restore citizens’ trust in governments.
“This important new research adds to a growing body of evidence that economic inclusion is strongly associated with longer and stronger periods of growth. Put simply, reducing inequality is not only a moral imperative, it’s an economic one,” said Xavier de Souza Briggs, vice president of Economic Opportunity and Assets at the Ford Foundation, a partner in the OECD’s work on inclusive growth.
The report also points out that there are trade-offs to policies that are a precondition for sustained growth, employment and alleviating. For instance, it says that reducing regulatory barriers to competition, boosting job search support and labour market activation programmes, can lift the incomes of the lower middle class faster than GDP growth rates; but that restricting unemployment benefits for the long-term unemployed reduces disposable incomes at the bottom end of the distribution. This, it suggests, highlights “the importance of combining reforms of unemployment income support with a strengthening of active labour market policies.”