UK Economy
Income inequality damages economies; Rich-poor gap highest in 30 years
By Michael Hennigan, Finfacts founder and editor
Dec 9, 2014 - 2:40 AM

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Cutting income inequality would boost economic growth, according to new OECD analysis. This work finds that countries where income inequality is decreasing grow faster than those with rising inequality. The research by the Organisation for Economic Co-operation and Development shows that the gap between rich and poor in the developed world is at the highest in 30 years.

According to the OECD's calculations, greater equality helped boost GDP per capita in Spain, France and Ireland in the period to 2000.

The single biggest impact on growth is the widening gap between the lower middle class and poor households compared to the rest of society, according to an OECD paper. Education is the key: a lack of investment in education by the poor is the main factor behind inequality hurting growth.

“This compelling evidence proves that addressing high and growing inequality is critical to promote strong and sustained growth and needs to be at the centre of the policy debate,” said Angel Gurría, OECD Secretary-General. “Countries that promote equal opportunity for all from an early age are those that will grow and prosper.”

Rising inequality is estimated to have knocked more than 10% percentage points off growth in Mexico and New Zealand over the past two decades up to the Great Recession. In Italy, the UK and the United States, the cumulative growth rate would have been six to nine percentage points higher had income disparities not widened, but also in Sweden, Finland and Norway, although from low levels.

The paper finds new evidence that the main mechanism through which inequality affects growth is by undermining education opportunities for children from poor socio-economic backgrounds, lowering social mobility and hampering skills development.

People whose parents have low levels of education see their educational outcomes deteriorate as income inequality rises. By contrast, there is little or no effect on people with middle or high levels of parental educational background.

The impact of inequality on growth stems from the gap between the bottom 40% with the rest of society, not just the poorest 10%. Anti-poverty programmes will not be enough, says the OECD. Cash transfers and increasing access to public services, such as high-quality education, training and healthcare, are an essential social investment to create greater equality of opportunities in the long run.

The paper also finds no evidence that redistributive policies, such as taxes and social benefits, harm economic growth, provided these policies are well designed, targeted and implemented.

The paper and a 4-page summary are available at  www.oecd.org/social/inequality-and-poverty.htm

More information about OECD work on inequality is available at  www.oecd.org/inequality.htm

More information about the OECD's  New Approaches to Economic Challenges Initiative

The Paris based Organisation for Economic Co-operation and Development is a think-tank for 34 mainly developed countries. OECD member countries are: Australia, Austria, Belgium, Canada, Chile, the Czech Republic, Denmark, Estonia, Finland, France, Germany, Greece, Hungary, Iceland, Ireland, Israel, Italy, Japan, Korea, Luxembourg, Mexico, the Netherlands, New Zealand, Norway, Poland, Portugal, the Slovak Republic, Slovenia, Spain, Sweden, Switzerland, Turkey, the United Kingdom and the United States. The European Commission takes part in the work of the OECD.

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