Press Conference, 2012 March 22, Budapest, Európa Kávéház Divided We Stand: Why inequality keeps rising Michael Förster, OECD Social Policy Division www.oecd.org/els/social/inequality 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
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
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
.. 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
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
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
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
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
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
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! 20 www.oecd.org/els/social/inequality 10
Overview of income inequality among the working-age population: a traffic light 21 11