Forum «Pour un Québec prospère» Pour des politiques publiques de réduction des inégalités pro-croissance Mardi le 3 juin 2014 NOUVELLES APPROCHES EN MATIÈRE DE RÉDUCTION DES INÉGALITÉS ET DE POLITIQUES D EMPLOI Stefano Scarpetta Directeur Emploi, Travail et Affaires Sociales OECD
Questions addressed today This presentation is structured in three main parts Part 1: structural and long-run determinants of income inequality Part 2: inequality during the Great Recession Part 3: (preliminary) results of OECD work on the links and interplay between inequality, intergenerational mobility and growth. 2/30
Part 1 Structural and long-run determinants of income inequality 3/30
Summary of the key stylised facts on trends in income inequality over the past 3 decades Income inequality increased in a large majority of OECD countries over the past 2-3 decades, including in traditionally more equal countries; Only a few high-inequality countries bucked the trend (mainly LAC): there was thus some convergence towards higher inequality across OECD countries; Income inequality increased during both recession and boom periods and despite employment growth; In many countries, income inequality increased especially at the top; OECD countries recorded a historically high level of inequality as they were shattered by the crisis in 2008. 4/30
Large country differences in levels of income inequality, 2011 Data refer to 2011 or latest year available. Source: OECD Income Distribution Database (www.oecd.org/social/inequality.htm), preliminary data. Note: the Gini coefficient ranges from 0 (perfect equality) to 1 (perfect inequality). Gaps between poorest and richest are the ratio of average income of the bottom 10% to average income of the top 10%. Income refers to cash disposable income adjusted for household size. 5/30
Income inequality before and since the Great Recession: the facts Long-term trends in inequality of disposable income (Gini coefficient) Source: OECD Income Distribution Database, www.oecd.org/social/income-distribution-database.htm. Preliminary data for 2011/12. Note: Income refers to disposable income adjusted for household size. 6/30
High Inequality can hinder social mobility The Gatsby Effect is alive and well Intergenerational earnings mobility is lower in highinequality countries The long-term effects of widening inequality are scary: they cumulate over time and across generations Source: OECD 2008 (Growing Unequal?) and d Addio (2012) Note: Data refer to mid-2000s. Intergenerational earnings mobility is proxied by the degree to which sons earnings are correlated with that of their fathers. 7/30
At the upper end of the distribution, the shares of very high incomes surged in many countries Shares of top 1% incomes in total pre-tax income, 1980 2010 (or closest) Source: OECD 2014. World Top Income Database. Note: 2010 refers to 2012 for the US, 201 for Sweden, 2009 for Finland, France, Ireland and Italy ; 2008 for Norway; 2005 for Portugal; and 1999 for Germany and the Netherlands. 8/30
In some countries, 20% and more of long-term growth has been captured by the top 1% Share of income growth going to income groups from 1975 to 2007 Source: OECD 2014, Focus on Top Incomes and Taxation in OECD Countries: Was the Crisis a Game Changer? Based on World Top Income Database. Note: Incomes refer to pre-tax income, excluding capital gains. 9/30
Causes of growing inequalities: The usual suspects Globalisation; 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. 10/30
OECD evidence on the main drivers of rising inequality in OECD countries No direct effect: Globalisation (trade, FDI) Ambiguous effects: Changes in regulations and institutions Lesser culprit: Changing household/family structures Main culprits: Skill-biased technological changes Changes in employment patterns and working conditions Weaker redistribution via the tax/benefit system Off-setting factor: Increase in education levels off-set much of the drive towards rising inequality 11/30
OECD evidence on main drivers of inequality: (i) focus on labour market changes Changes in technology were more beneficial for highskilled workers; 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; 12/30
Focus on the labour market: changes in working conditions and working hours Accounting for part-timers and self-employed increases earnings inequality Hours worked decreased most among low-wage workers Source: OECD 2011, Divided we Stand 13/30
Focus on the labour market: the role of non-standard work Households with only non-standard workers have much higher poverty rates than those with standard workers Income poverty rates by employment pattern Jobless 34% NSW 22% Mixed 3% Note: The poverty line is defined at 50% of the median equivalised household income for the entire population. Source: OECD (2014); EU-SILC, HILDA for Australia, KLIPS for Korea and SLID for Canada. 14/30
Focus on redistribution: taxes and benefits play an important role in almost all OECD countries Inequality of (gross) market and disposable (net) income, working-age persons Source: OECD 2013, Crisis squeezes incomes and puts pressure on inequality and poverty. Note: Data refer to the working-age population. 15/30
.. but redistribution became weaker in most countries until the onset of the crisis Percentage reduction of income disparity through taxes and transfers, working-age persons Source: OECD Income Distribution Database, www.oecd.org/social/income-distribution-database.htm 16/30
Why have tax/benefit systems become less successful at reducing inequality? Changes in overall redistribution were mainly driven by benefits: taxes also played a role, but to a lesser extent; Spending levels have been a more important driver of these changes than tighter targeting of benefits; Spending shifted towards inactive benefits, leading to reduced activity rates and higher market-income inequality. 17/30
Part 2 Inequality during the Great Recession 18/30
During the first years of the crisis, market income inequality rose considerably Percentage point changes in inequality of household market and disposable income, 2007-2010 Source: OECD Income Distribution Database, www.oecd.org/social/income-distribution-database.htm Note: Data refer to the working-age population. 19/30
In some countries, the surge of top income shares has come to a halt with the crisis but only temporarily Top income shares by income groups, 1995 = 100 Source: World Top Income Database. Note: Incomes refer to pre-tax income. 20/30
Part 3 Inequality, mobility and growth: recent findings from OECD work 21/30
Does inequality affect economic growth? The question has a clear policy relevance and has revived a long standing, controversial debate Incentives argument: Inequality is a necessary reward for costly/risky investments Opportunities argument: Inequality induces missed opportunities of investment (by the poor) and resource misallocation. Recent OECD work re-examines 1. the strength the inequality-growth nexus 2. the link between inequality, family background and human capital accumulation 22/30
1. Inequality and Growth: the setting Standard growth equation estimated with panel data (33 OECD countries, 1980-2010) Use both Gross and Net income (Gini) inequality allows to proxy for redistribution Look at the relative importance of inequality at different points (bottom and top) of the distribution 23/30
1. Inequality and Growth: main findings Higher (net income) inequality lowers economic growth Increasing income inequality by 6 Gini pt. lowers yearly GDP per capita growth by around 1 pp. In 2010, the US-Canada inequality gap was of ~6 Gini pts Result seems driven by income disparities at the bottom of the distribution. Top inequality is less, if any, relevant Redistribution (as captured by the data) have not led to bad growth outcomes 25/30
2. Inequality, family background and human capital accumulation Use large OECD individual survey (PIAAC). Focus on low (the poor), medium and high parental education background (PEB) individuals Relate their educational outcomes (formal education and skill proficiency) to inequality levels when aged ~14 Estimate whether (within country) changes in inequality have a differential impact on outcomes by PEB 26/30
The impact of inequality on formal education (1) Inequality lowers average years of schooling of the poor Increasing inequality by ~6 Gini pts. (the interquartile range) lowers AYS by almost 0.5 years. (around 50% of the baseline differential in AYS between Low and Medium PEB individuals) Note: average predicted Years of Schooling for individuals from poor, medium and high family (educational) background as a function of the degree of inequality (Gini points). Low PEB: neither parent has attained upper secondary education; Medium PEB: at least one parent has attained secondary and post-secondary, non-tertiary education; High PEB: at least one parent has attained tertiary education. The bars indicate 95% confidence intervals. 27/30
The impact of inequality on skills proficiency Inequality lowers (literacy and numeracy) skills of the poor Increasing inequality by ~6 Gini pts. (the interquartile range) lowers Numeracy score by ~ 6 pts. (nearly 40% of the baseline differential between Low and Medium PEB individuals) Note: average predicted Numeracy score for individuals from poor, medium and high family (educational) background as a function of the degree of inequality (Gini points). Low PEB: neither parent has attained upper secondary education; Medium PEB: at least one parent has attained secondary and post-secondary, non-tertiary education; High PEB: at least one parent has attained tertiary education. The bars indicate 95% confidence intervals. 28/30
Policy lessons for combating too high inequality from OECD work Both redistribution and inclusive employment policies matter Three main policy avenues to tackle too-high inequality: Reforming tax and benefit systems : Government transfers (cash and in-kind) have an important role to play to safeguard lowincome households.there is also scope for reviewing some tax provisions in light of increased tax capacity" among top-income households; Boosting employment and career prospects ( more and better jobs ) : Facilitate and encourage access to employment for underrepresented groups and address labour market segmentation; Investing in human capital: Promote up-skilling of the workforce, better training and education for the low-skilled. 29/30
Thank you for your attention! Stefano.scarpetta@oecd.org www.oecd.org/social/inequality.htm Follow us on Twitter: @OECD_Social