Employment

L20 Summit: Inequality and Inclusive Growth

 

Remarks by Angel Gurría, OECD Secretary-General

Brisbane, 14 November 2014

As prepared for delivery


Ladies and gentlemen,

I am delighted to be here today to discuss a G20 strategy for reducing unemployment and income inequality. I am particularly pleased to speak on this topic because it has been at the top of the OECD agenda for a number of years.

In 2008 we delivered the first-wake-up call with a study named “Growing Unequal?”. Please note the question mark! At the time we were still uncertain about whether this was a new normal. Three years later we produced a new study named “Divided We Stand: Why Inequality Keeps rising”. Unfortunately, there was no need for a question mark this time!

Today, the average income of the richest 10% of the population is almost about 10 times that of the poorest 10% on average in the OECD area, as opposed to 7 times in the 1980s and 8 times in the 1990s. The ratio was 50 to 1 in Brazil, albeit falling. Equally worrying is the rise in inequality even in traditionally more egalitarian countries, like Germany, and the Northern European countries, where the income gap rose from less than 5 to 1 in the 1980s to over 6 to 1 today.

And the gap between rich and poor has widened further since the crisis, largely because of large income losses suffered by the unemployed and under-employed. In fact, more than six years after the onset of the global financial crisis, the world still faces a large and persistent jobs gap. An estimated 102 million people remain unemployed in the G20, and many more are unemployed or under-employed in low paid and precarious jobs around the world.

Widening inequality of outcomes – such as income – reflects growing inequality of opportunity. It is increasingly difficult for low-paid workers to climb the social ladder. This is not only a social problem; it has also an impact on the growth prospects in our economies. Income inequality hurts growth through the lower propensity to consume for those at the higher end of the income distribution, and the lower capacity to save and spend for the lower income segments.

Over the past few decades, low-paid citizens have worked harder and harder. But their incomes are falling. They are failing to see the fruits of their labour. Most worryingly, inequality risks are becoming entrenched, as low-paid workers struggle to afford quality education for their children.

What is driving this trend? Advances in technology, while a key driver of economic growth, generally increase salaries and opportunities for the highly skilled, leaving those with intermediate or low skills behind. On top of this, many countries have undertaken pro-competition reforms in goods and services markets. This is good for productivity and growth, but has polarised wages and affected the poorest most. Many societies face the problem: equality of opportunities.

The issue is not one about inequality¬, but one about inequalities. Indeed, inequality is not only about income which is about flows. But it goes far beyond it to encapsulate inequality of assets which people accumulate over time, such as health, education, strength of social connections, political engagement and sense of personal security. Those who are shut out of opportunity often live shorter lives and find it difficult to break away from a vicious confluence of low skills and limited employment prospects. This has become truly multi-dimensional and this is exactly how the OECD tackles this problem, through our New Approaches to Economic Challenges - OLD and inclusive growth initiatives, and with the development of a multidimensional living standard.

New work underway at the OECD confirms that high levels of inequality can also harm long term economic growth. The analysis shows that if inequality continues to increase, it could result in a reduction of as much as 7.5% per cent in GDP per capita compared with a baseline scenario in OECD countries over the next 25 years.

This is a very important finding. Income disparities at the bottom 40% of the income ladder, in particular, can hold back economic growth because they limit the ability of young people from poor socio-economic backgrounds to invest in their human capital and skills, to enter into the labour market and engage with society. Thus, they become a drag on economic growth.

In this context, the OECD welcomed the G-20 collective commitment at Sydney: to lift its GDP by an additional 2% over the coming 5 years beyond a baseline scenario and to create millions of additional jobs. Thus, they announced ambitious, yet achievable, national growth strategies, to fulfil this commitment.

The OECD’s assessment, working with the IMF, is that these national growth strategies indeed could deliver up to an additional 2.1% of GDP. Among the almost 1000 commitments, all the policy ingredients are there that will be help boost demand, reduce unemployment, raise labour market participation, remove trade barriers, strengthen competition and encourage long-term investment.

However, we must be careful to ensure that G20 growth strategies not only boost growth and jobs, but also address inequalities. This requires win-win policies that combine strong economic growth with improvements in all those aspects of life that matter for people’s wellbeing – good health, jobs and skills, and a clean environment, security, civic engagement, work-life balance, etc...

Some redistribution of resources can support more inclusive growth, but it is not sufficient. The policy aim must be to equip all people with the skills and support necessary to take advantage of their circumstances and to adapt when these circumstances change.

First, we need not only more jobs but better quality jobs. High proportions of workers are involved in “atypical” and often precarious jobs which pay low wages and are most exposed to the risk of suffering losses in the event of a downturn. In Europe, for example, less than half of all temporary workers in a given year had full-time permanent contracts three years later. In emerging-markets and many developing countries informal and un-protected employment looms large and has increased during the recent crisis. Mandatory minimum wages now exist or are being implemented in 26 OECD countries, as well as in a number of emerging economies; if set at the appropriate level, they can help underpin the wages of low-paid workers without having adverse effects on employment.

Second, we need to see a greater focus on young people. Despite being the most educated generation ever to enter the labour market, today’s youth face a higher probability of being unemployed and poor than other age groups. Prolonged spells out of work erode human capital and lead to discouragement: many young adults are left in G20 countries with neither the skills nor the self-confidence to adapt to a challenging environment. The OECD’s Youth Action Plan is helping countries implement policies to ensure that no one is left without education, training or employment.

Third, we need to better address gender inequality. Women are now often better-educated than men, but remain largely under-represented in employment, earn lower wages, and have slower career progressions. In this context, I warmly welcome the commitment proposed by the G20 Labour and Employment Ministers to their Leaders to close the gender gap in labour force participation by 25% by 2025. Closing this gender gap could bring an extra 100 million women into G20 labour markets and yield an additional 1.2 – 1.6 pc point growth by 2025. I have often said that women are the most underutilised economic asset in our economies.

Responding adequately to the disadvantages faced by women requires policies to promote a more gender-equitable labour market, including affordable and high-quality childcare, providing incentives via the tax-benefit system for both partners to work, and fighting discrimination.

Fourth, we need to provide people with better skills. This is increasingly a life-long process, but for maximum effectiveness policy interventions must address income, wealth and health inequalities from the youngest ages. For example, investment in early childhood education and care has great payoffs in fostering resilience.

Last, but not least, we need to ensure that public policy and the private sector are working in partnership to promote Inclusive Growth. The onus is on the private sector to ensure that responsible business conduct is observed in the treatment of staff, but the public sector also has a role to play! OECD’s Guidelines for Multinational Enterprises, with 46 adhering governments, have built-in grievance mechanisms that provide citizens with direct access to remedies for alleged harm.

More generally, the role of public policy should be to create the right environment for more inclusive practices in the private sector. International initiatives, such as the OECD’s work with the G20 on Base Erosion and Profit Shifting and the new OECD Common Reporting Standard for Automatic Exchange of Information, which I will present to leaders at the Summit, help to make sure that businesses and wealthy individuals contribute fairly to government coffers: ensuring that taxes on profits are paid, where they are generated. This is also about fairness and justice for the hard working people and honest taxpayers around the globe!

Ladies and gentlemen,

In order to achieve strong, sustainable and balanced growth the G20 must commit to policies that combine strong economic growth with improvements in all those aspects of life that matter for people’s wellbeing. Significant progress will have been made by meeting the 2% growth target. However, the G20 must also place inclusiveness at the heart of the growth debate and open up the opportunity for every citizen to realise their potential, to contribute to, and benefit from, more inclusive economic growth.

The OECD is proud to be working closely with the G20 to advance this debate, to promote more inclusive economies and more equal societies, and to deliver “better policies for better lives”.

Thank you.