Countries with widening income gaps are growing more slowly.
Countries with widening income gaps are growing more slowly
The OECD has today confirmed the negative impact that income inequality is having on growth in the UK.
Analysis released today shows that income inequality has a statistically significant impact on subsequent medium term growth.
Countries where income inequality is decreasing are growing faster than those with rising inequality; the research concludes that the ‘single biggest impact on growth is the widening gap between the lower middle class and poor households compared to the rest of society’.
The research also reveals that the economic crisis has not altered the trend of increasing inequality; in two-thirds of OECD countries, the top ten per cent of the population did better than the poorest ten per cent between 2007 and 2010.
However, the OECD emphasises that the impact of inequality on growth stems from the gap between the bottom 40 percent with the rest of society, not just the poorest ten percent.
The OECD estimates that rising inequality has knocked six to nine percentage points off the cumulative growth rate in Italy, the US and the UK. In contrast, greater equality helped to increase the per capita GDP in Spain, France and Ireland before the recession.
OECD secretary-general Angel Gurría said of the findings:
“This compelling evidence proves that addressing high and growing inequality is critical to promote strong and sustained growth and needs to be at the centre of the policy debate.
“Countries that promote equal opportunity for all from an early age are those that will grow and prosper.”
According to the paper, a lack of education for children from poorer socio-economic backgrounds is the main reason for inequality hurting growth. Parents with low levels of education see the educational outcomes of their children deteriorate as income inequality rises, while people with middle or high levels of parental education see little or no effect.
Previous research by OECD has implicated income capture by the top one per cent of earners as one of the key factors in continuing inequality. John Evans, the general secretary of the Trade Union Advisory Committee to the OECD, said:
“The capture of the policy agenda by top income earners through their excessive domination of political funding is leading to a serious distortion of public policy and builds inequity into economic growth models.
“There is for instance a strong negative correlation between the top marginal tax rates and the pre-tax shares of top incomes across OECD countries.”
On today’s findings, Evans emphasised that inequality not only undermines individuals at health and education levels, but puts the social compact of OECD countries at risk. He said that there had been no reliable evidence supporting the existence of a ‘trade-off’ between redistribution and growth; on the contrary, policies aimed at reducing inequality are likely to have a positive effect on growth.
The OECD has stated today that its research on determinants of inequality is ongoing, and that further research is needed into the areas of policies and institutions that can correct inequality. It says that anti-poverty programmes alone are not enough, and that other measures are necessary; cash transfers and increasing access to public services, especially high quality education,will help to create more equal opportunities.
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