Social policies and data

Launch of Growing Unequal? Remarks by Angel Gurría, OECD Secretary-General


Launch of Growing Unequal?

Remarks by Angel Gurría, OECD Secretary-General

Paris, France, 21 October 2008 

Ladies and Gentlemen,

I am very pleased to present to you the results of three years of intense study of inequality trends in OECD countries. Let me take the opportunity to thank our national counterparts without whom we could never have produced this report.

The value of this work is shown by its main finding: Over the past few decades, inequality has gone up in over three-quarters of OECD countries. The trend is clear and its implications are very serious.

Growing inequality raises three types of challenges: economic, political and ethical.

First, growing inequality is an economic challenge. Six years ago, the OECD looked at links between inequality and growth. We found no evidence that inequality may be conducive to growth in OECD countries, as some had suggested. There is nothing in this new study to suggest otherwise.  On the contrary, our work shows that greater income inequality stifles upward mobility between generations, making it harder for talented and hard-working people to get the rewards they deserve. And the resulting inequality of opportunities, the lack of “social capillarity”, inevitably impacts economic performance as a whole.

Secondly, growing inequality raises political challenges because it breeds social resentment, it questions the ultimate role of democracy and generates political instability. It also fuels populist, protectionist and anti-globalisation sentiments.  People will no longer support open trade and free markets if they feel that they are losing out while a small group of winners is getting richer and richer.
Finally, on the ethical challenges of inequality, let me quote President George W. Bush. In his 2007 State of the Economy Address, he said, “our citizens worry about the fact that our dynamic economy is leaving working people behind.” He added, “we have an obligation to help ensure that every citizen shares in this country’s future.  The fact is that income inequality is real; it's been rising for more than 25 years.” This statement could have been made by a large majority of the OECD leaders.

Growing inequality is divisive – a point echoed in the ILO’s World of Work 2008 Report which was released a few days ago. It polarizes societies, it divides regions within countries, and it carves up the world between rich and poor.

The world has been experiencing an unprecedented era of economic growth over the past decades, which has made people better off, on average.  But, like with all averages, this is more true for some than for others. Our study shows that growth has benefitted the rich more than the poor in recent decades.  The number of people living in relative poverty has increased.

On average, in 2005, the richest 10% of the population in OECD countries have 9 times more income than the poorest 10%.  In Nordic countries the gap is less stark – but still the rich there have 5-6 times as much income as the poor.  In Mexico the ratio is 26 to 1, and in the United States, 16 to 1. The Italian rich are 11 times richer than the poor; 10 times richer in Japan; 9 times in Canada and the UK, 8 times in Germany and 6 times richer in France. 

What does this mean in absolute terms? It means that the poorest 10% of the population in a typical OECD country has to get by on less than $7000 per year.  In Italy and the United States, the poorest 10% have even lower incomes – just a little above $5000 per year, even though their average income per capita is comparatively high.

A big worry is that children have been among the losers. Today, OECD countries are spending 3.5 times more on family policies than they did 20 years ago. But child poverty rates have gone up.  Children are now 25% more likely to be poor than the population as a whole. Child poverty is one of the most destructive and dramatic results of inequality. It will permanently scar a generation, preventing it from ever reaching its full potential.

Doesn’t inequality encourage people to try to do better? Our data dispel this myth to a large extent. Social mobility is low in countries with high inequality like Italy, the UK and the United States. And it is much higher in the Nordic countries, where income is distributed more evenly. This means that, in most high-inequality countries, dishwashers’ sons are more likely to be dishwashers and millionaires’ kids can assume that they too will be rich.

The good news is that there is nothing inevitable about growing inequality.  Governments can make a difference.  The entire economic model requires some innovative thinking.

In the past, countries dealt with growing inequality in earnings and jobs by taxing people more and spending more on social benefits.  And for some countries, for example Korea, Turkey and most Latin American countries, this is still the right way to go. At the same time, there is certainly much room to improve the efficiency of social spending.

But for most OECD countries, this approach alone is no longer going to work. For a start, not everyone wants to live in a country with high taxes to pay for high social spending.  And imposing more and more taxes reduces incentives to work, save and invest. Some governments worry that higher taxes on the rich will lead them to relocate their activities.

Although the role of the tax and benefit system in redistributing incomes and in curbing poverty remains important in many OECD countries, our data confirms that its effectiveness has gone down in the past ten years.  Trying to patch the gaps in income distribution solely through more social spending is like treating the symptoms instead of the disease. 

If we want to reduce inequality in a sustainable way, we have to understand why some people are not able to take advantage of the amazing opportunities of a high-tech, globalised economy. Helping people to help themselves has the fortunate effect of helping the economy as a whole.

 “Growing Unequal?” shows that the largest part of the increase in inequality comes from changes in the labour markets. This is where governments must act. Increasing employment is the best way of reducing poverty.  In a typical OECD country, your chance of being poor is 6 times higher if no-one in the household is working than if someone is.  Our study also shows that the gap between incomes of high- and low-skilled workers has risen.  It has doubled in the United States over the past two decades, for example.

Thus, a key element in tackling poverty and inequality lies in creating more and better jobs.  In our Jobs Strategy, the OECD has long been urging governments to act accordingly. Countries which have created jobs have seen poverty rates fall – as in the United Kingdom, since 2000.  Another example is the Netherlands during the 1990s, where social spending was reduced by 6 percentage points of GDP without increasing poverty, because hundreds of thousands of people managed to find work. In order for higher employment to translate into a sustained drop in poverty, it is important to ensure that as many as possible of the jobs created be full-time jobs.

Three policy areas are particularly important in making sure that everyone in our societies can benefit from economic growth:

1. Education.  Better education is a powerful way to achieve growth which benefits all, not just the elites.  And it is the key to upward social mobility. If access to early childhood education or to tertiary education depends on the depth of parents’ pockets, it is very hard for the child of poor parents to do well. If quality education depends on the neighbourhood where you live, this will also impact the capacity of people to improve their lives.

 2.  Make Work Pay.  However necessary, reforms in education take a long time before their full impact is felt. In the immediate future, we need policies that address directly the increasing earnings inequality.  There are a number of good examples. In-work benefits – such as the Earned Income Tax Credit in the United States, the Revenu de Solidarité Active in France and the Working Tax Credit in the United Kingdom -- help reduce poverty by encouraging more people to work while, at the time, giving working families a boost in their income.

3. Tackle Child Poverty.  Growing Unequal?  shows that children gained less from economic growth than other groups.  Poor children do not eat well, do not learn well and have low chances of escaping poverty when they grow up. This is unacceptable.

The countries that do best in keeping child poverty low are those which help mothers work.  Yet many families are struggling to reconcile family and work responsibilities. Services intended for children and their parents often do not reach those most in need.  The OECD recently published a report called Babies and Bosses which shows how sensible investments in child care, parenting support and in promoting flexible employment can help solve this problem. These investments promise high returns and low risks, a combination which no doubt appeals even more to governments now than it did a few months back. 

The ‘ostrich’ approach to policy – ignoring difficult issues, in the hope that no-one will talk about them and that they will eventually go away -- will not work, as we are witnessing painfully in the current financial crisis. Thus, ignoring increasing inequality is not an option, but rather a very risky course with inevitable social and political consequences. With this publication we are making an important contribution towards a more inclusive, more sustainable and more promising globalisation for all.