At the end of 2014, the OECD published a working paper titled “Trends in Income Inequality and its impact on Economic Growth” arguing that the disparity in the distribution of incomes has been rising over the past three decades in a majority of OECD countries. Addressing income inequality and the long-term trend towards higher disparity has risen to the top of the political agenda in many countries. This is occurring partly due to growing concerns over income inequality and its impact on economy growth and on the slow pace of exiting the current economic crisis.
Following a series of analyses of these trends, the OECD examined whether rapid increase in inequality might have an effect on economic growth and on the pace of recovery from the current recession. In this sense, this paper argues that a rapid increase in income inequality has a negative and statistically significant impact on subsequent growth. In particular, what matters most is the gap between low income households and the rest of the population.
Analysis based on the OECD data suggests that redistribution policies via taxes and transfers are a key tool to ensure the benefits of growth are more broadly distributed and the results suggest they need not be expected to undermine growth. But it is also important to promote equality of opportunity in access to and quality of public services. This implies a focus on families with children and youths, promoting employment for disadvantaged groups through active labor market policies, childcare supports and in-work benefits.
As an alternative way to represent the effects of inequality by focusing on changes in individual countries, the report estimates that more than 10 percentage points have been knocked off growth by rising inequality in Mexico and New Zealand during 1990-2010. On the other hand, greater equality increased GDP per capita in Spain, France and Ireland prior to the crisis.
The OCDE working paper concluded that reducing income inequality would boost economic growth, and that countries where income inequality is decreasing grow faster than those with rising inequality. Moreover, it shows that government transfers have an important role to play in guaranteeing that low-income households do not fall further behind in income distribution. However, it should not be limited to cash transfer programs, but incorporates policies to promote and increase access to public services.
Although the report did not look at inequalities between different identity groups, we know that the most disadvantaged groups are often from a different ethnic or other identity and therefore, in overall terms, the OECD analysis is linked with the guiding principles of the Economics of Shared Societies: a society in which diverse groups and individuals are economically integrated and utilize their talents and skills tends to be more stable and enjoy higher economic growth than divided societies.
Photo from the Diario Do Centro do Mondo