Many still question the motivations of the "Occupy Wall Street" movement.  These people should read the recent OECD publication "Divided We Stand: Why Inequality Keeps Rising" (see: www.oecd.org/els/social/inequality)

According to the normally staid OECD, governments must act quickly to tackle inequality because the gap between rich and poor in OECD countries has reached its highest level for the past half century.  Indeed, the situation has worsened since the release of the OECD's Growing Unequal report in 2008.

For the OECD group as a whole, the average income of the richest 10% is now about nine times that of the poorest 10 %, up seven times from 25 years ago.  Even in traditionally egalitarian countries, such as Germany, Denmark and Sweden, the income gap has risen from 5 to 1 in the 1980s to 6 to 1 today. The gap is 10 to 1 in Italy, Japan, Korea and the United Kingdom, and higher still, at 14 to 1 in Israel, Turkey and the United States.

In many emerging economies, the situation is worse.  In Chile and Mexico, the incomes of the richest are still more than 25 times those of the poorest, although they have finally started dropping.  At 50 to 1, Brazil's income gap remains much higher than in many other countries.

Does income inequality really matter?  In fact, sustained inequality is both bad for economic growth and social cohesion.  When the housing bubble burst a few years ago, it was the most vulnerable who couldn’t afford to pay for their mortgages anymore.  And there is strong evidence that excessive borrowing was related to these income gaps.

The economic crisis has added urgency to the need to address inequality. The social compact is starting to unravel in many countries leading to unrest.  And uncertainty and fears of social decline and exclusion have reached the middle classes in many societies. People feel they are bearing the brunt of a crisis for which they have no responsibility, while those on high incomes appear to have been spared. Addressing the question of “fairness” is a condition-sine-qua-non for the necessary restoring of confidence today.

So what has caused the rise in iequality?  Within the complex web of factors, the single most important driver has been greater inequality in wages and salaries. This is no surprise: earnings from work make up about three-quarters of total household incomes among the working-age population in most OECD countries.

Why have wages become more unequal?  The labour markets of all countries have gone through profound transformations driven by globalisation, technological changes and policy reforms. For example, technological progress has clearly been a key motor for economic growth; but highly skilled workers have benefitted much more than others.

People with skills in high demand - in information and communication technologies or specific to the financial sector, for instance - have enjoyed significant earnings and income gains, while workers with low or no skills have been left behind. The increase of top incomes is also the result of companies operating in a global market for talent, as well as of a spectacular rise in bankers’ and top executives’ pay, and of the emergence of a “winner-takes-all” culture in many countries.

Labour market outcomes have also been significantly shaped by policy and regulatory reforms, both in the markets for goods and services where competition was strengthened and in labour markets, which were made more adaptable.  While these reforms have promoted productivity and economic growth and brought more people into work, in particular many women and low-paid workers, the logical consequence of more part-time and low-paid workers is a widening distribution of wages.

Moreover, the distribution of non-wage incomes, and especially capital income, has also become more unequal. However, at around 7%, the share of capital income in total household income still remains modest on average and its impact on overall inequality is therefore limited.

What does the OECD recommend to address this inequality?  One promising path is to foster the employment of under-represented groups. Creating more jobs – and especially more productive and rewarding jobs – which enable people to escape poverty and offer real career prospects, is the most important challenge.

Investing in human capital is also essential to promote employment and employability, and to tackle inequality.  Up-skilling of the workforce is by far the most powerful instrument to counter rising inequality.

The investment in people must begin in early childhood and be followed through into formal education and work. This is vital to ensure equality of opportunity for children from disadvantaged backgrounds. Human capital investment then needs to be sustained over the working life. The way that training is provided also needs careful assessment and both employers and individuals need the means and incentives to invest in human capital.

Reforming tax and benefit policies are also measures that can promote a better distribution of income. Tax-benefit systems have become less effective at redistributing incomes over the past decades. The main reason for this declining redistribution is on the benefit side: levels were cut and eligibility rules tightened to contain social spending, and transfers to the lowest income groups failed to keep pace with earnings growth.

Over the last two decades, there was a move away from highly progressive income tax rates and net wealth taxes in many countries. As top earners now have a greater capacity to pay taxes than before, some governments are re-examining their tax systems to ensure that wealthier individuals contribute their fair share of the tax burden.

This aim can be achieved in several different ways. They include not only the possibility of raising marginal tax rates on the rich but also improving tax compliance (and in this areas we have been helping governments eliminate bank secrecy and fiscal havens), eliminating tax deductions, and reassessing the role of taxes on all forms of property and wealth.

Another important instrument especially for emerging economies is the provision of high-quality public services, such as education, health, and family care. On average, OECD governments spend as much on public social services – some 13% of GDP – as they do on all cash benefits taken together and this spending reduces inequality by about one fifth on average.

Ensuring equal access for all to such services is a challenge in many emerging economies, but it is of critical importance in order to reduce inequality and provide equal opportunities of personal and professional development for all citizens.

The OECD concludes that the benefits of economic growth DO NOT trickle down automatically.  Greater inequality DOES NOT foster social mobility. Without a comprehensive strategy for inclusive growth, inequality will continue to rise. There is nothing inevitable about high and growing inequalities. Our policies have created a system that makes them grow and it’s time to change these policies.

This timing of this report, just before Christmas, is perfect, as OECD Secretary-General calls for us to “Go Social!”.  As laudatory as this chant is, there is little evidence that the OECD governments are putting “better policies for better lives” at the centre of their policy efforts.  Too many people live in a world with few opportunities or hope.

Reference:

OECD.  Divided We Stand: Why Inequality Keeps Rising.

www.oecd.org/els/social/inequality