Divided We Stand: Why inequality keeps rising

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1 Press Conference, 2012 March 22, Budapest, Európa Kávéház Divided We Stand: Why inequality keeps rising Michael Förster, OECD Social Policy Division OECD, Directorate for Employment, Labour and Social Affairs Inequality is no longer a pure social policy concern Rising inequality is one of the major risks to our future prosperity and security (OECD Chief Economist Pier Carlo Padoan); 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-quanon for the necessary restoring of confidence today (OECD SG Angel Gurría) 2 1

2 Huge country differences in levels of income inequality 1:27 1:15 Income gap between poorest and richest 10% 1:9 Source: OECD 2011, Divided we Stand. Note: Incomes are net incomes of the working-age population. 3 Perceived and observed inequality: no correlation but country groupings Continental Europe, Eastern Europe I Southern Europe, Eastern Europe II Perceived inequality Nordic countries English speaking countries 4 Actual inequality (Gini) 2

3 Income inequality increased in most OECD countries.. 5 Source: OECD 2011, Divided we Stand. Note: Incomes are net incomes of the working-age population... and it increased in traditionally egalitarian countries, too 6 Source: OECD 2011, Divided we Stand. Note: Incomes are net incomes of the working-age population. 3

4 .. Hungary recorded several episodes in income inequality development 7 Source: OECD 2011, Divided we Stand. Note: Incomes are net incomes of the working-age population. Diagnosis Income inequality increased in both high- and low-inequality countries alike; Income inequality increased during both recession and boom periods; Income inequality increased despite employment growth up to the recession. So what happened? Developments in labour earnings and labour markets are the main driver. 8 4

5 Causes of growing inequalities: The major strands of explanation Globalisation, brought by rapid economic integration; Skill-biased technological changes; Institutional and regulatory reforms; Changes in employment patterns; Changes in family formation and household structures; Changes in tax and benefit systems. 9 OECD evidence on main drivers of inequality Globalisation (trade, FDI, financial liberalisation) had little impact on wage inequality trends per se but put pressure on policies and institutional reforms; Such institutional and regulatory reforms aimed at promoting growth and productivity while they had a positive impact on employment, at the same time have been associated with increased wage inequality; Changes in technology: technical progress was more beneficial for high-skilled workers Increases in human capital off-set much of the drive towards rising inequality. 10 5

6 Main drivers of changes in earnings distribution among the w/a-population Impact of: Employment Wage dispersion Estimated overall earnings inequality Trade integration = = = FDI = = = Technological progress = + + Declining union coverage + + =/- Product market deregulation + + +/ = / - Weaker EPL for temporary workers = + + Declining tax wedge + + = / - 11 Declining UB for low-wage workers / = / - Up-skilling (increased education levels) OECD evidence on main drivers of inequality (cont.) Changes in working conditions: part-time work and non-standard labour contracts increased; Changes in working hours: many countries saw an increasing divide in hours worked between high- and low-wage workers; Changes in household structure: more people living on their own or with partners in the same earnings bracket. 12 6

7 Accounting for part-timers and selfemployed increases earnings inequality 13 Source: OECD 2011, Divided we Stand Hours worked decreased most among low-wage workers Trends in annual hours worked by earnings group, mid-1980s to mid-2000s 14 Source: OECD 2011, Divided we Stand 7

8 Redistribution through taxes and benefits plays an important role Market incomes are distributed more unequally than household net incomes: taxes and benefits reduce inequality by a quarter 15 Source: OECD 2011, Divided we Stand. Note: Data refer to the working-age population... but redistribution became weaker in most countries How much of the increase in market income inequality since 1985 was offset by income taxes and cash transfers? 16 Source: OECD 2011, Income Distribution Database 8

9 Why have tax/benefit systems become less successful at reducing inequality? While overall redistribution has increased, this was not enough to offset growing market-income inequality; Changes in overall redistribution were mainly driven by benefits: those became more redistributive during the 1990s but less effective since then; Spending levels have been a more important driver of these changes than tighter targeting; Spending shifted towards inactive benefits, leading to reduced activity rates and higher market-income inequality. 17 Social services also redistribute income Education, health, care etc. reduce inequality by a fifth 18 Source: OECD 2011, Divided we Stand. Note: Services include public services for education, health, social housing, child care and elderly care. 9

10 Policy implications for OECD countries More and better jobs : Increasing employment may contribute to sustainable cuts in income inequality, provided employment gains occur in jobs that offer career prospects; Facilitate and encourage access to employment for underrepresented groups: address labour market segmentation; Promote up-skilling of the workforce: better training and education for the low-skilled; Guarantee access to high-quality public services; Government transfers (cash and in-kind) have an important role to play to safeguard low-income households; Scope for reviewing some tax provisions beyond effects on incentives and revenues. Both redistribution and inclusive employment policies matter. 19 Thank you for your attention!

11 Overview of income inequality among the working-age population: a traffic light 21 11

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