Remarks by Angel Gurría, OECD Secretary-General
All Party Group on Inclusive Growth
London, 23 February 2015
Members of Parliament, Distinguished Guests, Ladies and Gentlemen,
Today, inequality stands atop the global agenda. It has become a political buzzword - a shorthand for having your finger on the economic pulse - used by everyone from Thomas Piketty to the regulars at Davos.
Yet, despite being the political and economic issue of our times, solutions to the problems posed by rising inequalities have been thin on the ground. In many countries, policy proposals have so far been piecemeal, and the public debate has re-run past battles about the merits of redistribution.
This has got to change. The severity of the challenge we face is too great, and the economic, social and political risks of failure too high, for inaction or half-measures. We need to find common purpose, to put in place a comprehensive structural programme to fight inequalities and make Inclusive Growth - Old site happen.
The Scale of the Problem: Trends in Inequality
First let me remind you of the true scale of the problem. There is a longstanding idea that the rising tide of economic growth lifts all boats, but across the 34 advanced economies that make up the OECD, some boats are riding high, whilst others have run aground. Twenty five years ago, the average income of the richest 10% here in the UK was eight times that of the poorest 10%; today it is almost ten times greater.
At the same time, the incomes of those at the very top have soared to ever more dizzying heights, with the share of UK national income going to the top 1% nearly doubling from just under 7% in 1981 to 13% in 2011. That’s well above the increases seen in other OECD countries like Italy, France, Canada, Australia, Sweden and Denmark - with only the US seeing a faster rise.
These figures present a stark picture of how our traditional economic growth agenda has neglected inclusiveness and generated increasingly unequal benefits from growth. To put it bluntly: they show how those at the top have pocketed the majority of the gains of improved economic performance.
We need to take action, to ensure a fairer distribution of the proceeds from growth. Yet to begin to tackle this problem, we have to understand that inequality is not just about income. It extends into every area of our lives, affecting employment opportunities, health status and educational attainment.
We have seen this in the wake of the crisis, as right across the OECD vulnerable groups, like the young, have borne the brunt of increased unemployment; whilst non-standard working arrangements and in-work poverty have proliferated. We see this, too, in health, where in 2012 the top 20% of income earners in every OECD country reported better health than the bottom 20%. In the UK, the gap between the two groups stood at over 20 percentage points!
But nowhere are the harmful effects of inequality more apparent than in education. The children of poorer parents often struggle to keep up with the social and cultural capital of their wealthier class-mates. From that initial disadvantage, many go on to lower educational attainment and smaller salaries. This is clearly unacceptable. But worse still, there is even evidence to suggest that those with lower educational attainment go on to lead shorter lives. Data from 14 OECD countries shows that at age 30, people with the highest levels of education can expect to live 6 years longer than their less educated peers.
We should also not lose sight of the fact that inequalities play out in places: in our regions, cities, and towns. Here in the UK, there are big income differences between the richest regions like London and the South-East, and poorer regions in Wales and Northern England. On the jobs front too, regional disparities are high, with the OECD report How's Life in Your Region? showing South East England amongst the top OECD performers for employment, with North East England languishing in the bottom 30%.
But we shouldn’t assume that just because a region or city is rich that everything is okay. Within cities like London inequalities are enormous, with the very richest living cheek by jowl with the very poorest. Take Haringey, just a few miles up the road from here. Of the 19 wards that make up the Borough of Haringey, four are in the richest 10% of London wards and five are in the poorest 10%.
The impact of inequalities: corroding growth and trust
Inequalities harm individuals, but they also hurt economic potential. Here in the UK, the employment situation is better than in many other advanced economies, and has recovered to its pre-crisis level. Yet, as our Economic Survey - which I will be launching tomorrow - points out, weak labour productivity since 2007 has been holding back real wages, increasing inequality, and reducing well-being and economic growth!
Poor productivity growth is exacerbated by the difficulties people from disadvantaged families face in attempting to climb the social ladder. Our most recent Survey of Adult Skills (PIAAC) revealed that socio-economic background has an important impact on adult literacy skills in the UK, putting the poorest at a disadvantage. This is reinforced in later life, as participation in adult education and training is more common amongst those who are already highly skilled, trapping low-skilled workers in a situation in which their skills remain weak or deteriorate over time.
This is fundamentally bad for inclusiveness and bad for growth! It perpetuates a vicious circle of exclusion, leading to weaker social mobility, and poorer economic performance. In fact, recent OECD research estimates that rising inequality has knocked as much as 9 percentage points off growth in the UK in the last twenty five years. That’s against 6 or 7 points in the US, Italy and Sweden. And this is a direct result of families with lower incomes slipping behind, which has led to poorer people under-investing in education and skills.
Inequalities also have a corrosive effect on the stability of our democracies. Trust in government has now hit an all-time low of 40% across the OECD. In the UK, higher income groups are likely to have better political representation, simply in virtue of the fact that they vote in greater numbers. The “turnout gap” between the top 20% of income earners and the bottom 20% in the UK over recent elections is estimated to be around 23%, more than twice the OECD average. This presents a very real danger to the democratic process, as people may become permanently disengaged, if they feel that governments of all stripes no longer work for them.
There is an urgent need to take action
There is an urgent need to take action and to change our conversation on growth. Of course, rising GDP is absolutely essential to the equation, but we have to look beyond growth, to see how well people are really doing in other areas like jobs, education, and health.
We also need to reassess our measurement tools. We can no longer think in terms of Ms. or Mr. Average – what you in the UK used to call ‘the man (or woman) on the Clapham Omnibus’ They don’t exist. They’re “statistical constructs.” Simply looking at Ms. Average fails to capture the wide disparities among social groups.
The OECD’s approach builds on these insights. We have developed a Framework for Inclusive Growth that recognises that there’s more to life than money. In doing so, we look at employment and health on top of income. And we also look at the distribution, to see how everyone is doing.
Our ultimate goal is to help governments identify concrete actions to promote Inclusive Growth, and to give them the means of measuring and analysing synergies and trade-offs between pro-growth and pro-inclusive policies. Here’s the bottom line: the results of our work have clearly shown that there doesn’t have to be a trade-off between growth and equality. On the contrary, the opening up of opportunity can spur stronger economic performance and improve living standards across the board!
Making Inclusive Growth happen in the UK
There is no secret to growing more equally. Let me share a few examples of concrete actions that could help promote Inclusive Growth here in the UK.
First, investment in education and skills is vital for supporting the poorest and promoting social mobility. But, it will also help to promote growth, enhance individual well-being and benefit society at large, increasing the tax base and the pool of skilled workers. In the UK, the establishment of business-led Local Enterprise Partnerships has created a system which is better connected with employers, ensuring that they take greater ownership in directing and delivering skills development opportunities.
This is a fantastic start, but more needs to be done to reduce potential skills mismatches and align skills formation opportunities with the world of work. In particular, more support should be given to schemes to enable SMEs to collaborate on apprenticeships and other types of training. Additionally, gaps in careers advice provision could be filled by further involving employers in the education system. This will help to furnish people from disadvantaged backgrounds with the skills they need to succeed, and provide a much needed boost to productivity!
Second, labour market reforms need to focus on helping under-represented groups into high-quality work. Take the example of single parents. Reforms introduced in the UK back in 2008 have seen a modest increase in employment amongst this group, but many of those lone parents that moved back into employment moved into low-skilled, poorly paid, part-time work.
To boost inclusiveness and support future growth the Job Centre Plus could be given an additional remit: to assist parents in the search for childcare. This would allow parents to work full-time, and give them more time to dedicate to improving their skills. More generally, there is a need for greater funding for labour market training programmes, to enable all unemployed people to address skills deficiencies and help more people enter employment.
Finally, devolving power to regions and local communities can empower local policy makers to pursue Inclusive Growth. I know that this has been a subject of longstanding debate here in the UK, but those closer to the action are often better placed to understand the non-pecuniary impacts of growth and inequality, which often depend on local conditions. They are also often better able to see the potential for devising solutions that promote both growth and well-being, across the income scale. England, in particular, would benefit from less centralised administration. But, in the absence of demand for Political English regions, empowering cities will be key.
Ladies and Gentlemen,
The challenge before us is clear. It is no longer possible for us to think about inequalites and growth separately. We need to promote more Inclusive Growth to ensure the recovery and lay the foundations for a shared and affluent future.
This will demand a new bipartisan spirit, where political parties, and leaders from civil society and business come together to recognise that the long-term prosperity of an economy depends on the broader success of its individual parts.
You can make Inclusive Growth in the UK a reality!