Why does this matter to policy makers? Inequality is a critical social and economic challenge. Widening disparities weaken the structures that hold our societies together and threaten our ability to move forward. This effect has become even more apparent with the current prolonged crisis, which has been felt by a wide range of income groups throughout the OECD area. Incomes at the bottom of the ladder have declined. Middle incomes have been squeezed too. Budget austerity has not only affected benefits and welfare entitlements, but also the delivery of services, such as healthcare and education. And although the employment crisis has hit young people, women, minorities and the long-term unemployed in particular, very few people feel completely secure in their jobs. People have joined protests such as Occupy Wall Street, the March for Jobs and the Indignados, and they have been using social media to express their frustration and anger. The fact that bonuses are being handed out in banks that are still propped up by the state adds a sense of betrayal to perceptions of endemic inequality.
Economic activity has suffered too. Friedrich Hayek believed economic advance to be the result of inequality, whereas at the other extreme Karl Marx saw widening inequality as an inevitable part of capitalism’s decline. Both of these views clearly need to be revisited in light of the current economic and social landscape. Present-day economists wading in on this old and divisive debate increasingly acknowledge that sustained inequality inhibits growth, and this is an issue the OECD is studying closely.
Two major OECD reports, Divided We Stand: Why Inequality Keeps Rising, issued in November 2011, and Going for Growth in February 2012, examine the policy responses to widening inequality, while exploring how growth and equity interact.
In general, we see three main ways to tackle inequality: promoting employment for all; enhancing access and performance in education and training at every level by investing in people’s skills; and reforming tax/benefit systems to help a fair distribution of income while fostering growth.
None of these is easy. Yet steps can be taken, such as providing better employment protection and in-work benefits for temporary and part-time workers, which help to reduce income disparities by preventing young workers, women, minorities and other unskilled workers from becoming trapped in low-paid jobs.
OECD data find that public spending on high-quality education, health and family care reduces inequality by about a fifth on average. Most people rely on the state to provide these services. Surely this crisis underlines the importance of strong policies that can protect vulnerable groups, give breathing space to middleincome earners, and ensure that everyone, including those on higher incomes, pays their fair share. Such policies would restore cohesion and give our economies more traction.
Or take the tax-benefit systems, for instance. These have become less effective in redistributing income in recent decades, due to cuts in benefits, tighter eligibility rules and a shift away from progressive income tax. Some countries will find room to improve fairness by closing tax loopholes, eliminating deductions and tax havens, and reassessing taxes on wealth and property. Tax rates on high earners have declined in recent years, so raising marginal tax rates on high incomes would help restore fairness and generate some extra revenue as well.
Inequality is not inevitable, and it is up to policy makers to build comprehensive strategies for inclusive growth and better wealth distribution. The OECD can advise on those strategies and, by drawing on best practices, it can help design and promote better policies for better lives.
OECD (2011), Divided We Stand: Why Inequality Keeps Rising, OECD Publishing.
©OECD Observer No 287 Q4 2011