Press Conference, 2012 March 22, Budapest, Eurpa Kvhz

Divided We Stand: Why inequality keeps rising

Michael Frster, OECD Social Policy Division
www.oecd.org/els/social/inequality
OECD, Directorate for Employment, Labour and Social Affairs

Inequality is no longer a pure social policy concern

Rising inequality is one of the major risks to our future prosperity and security (OECD Chief Economist Pier Carlo Padoan); People feel they are bearing the brunt of a crisis for which they have no responsibility, while those on high incomes appear to have been spared. Addressing the question of fairness is a condition-sine-quanon for the necessary restoring of confidence today (OECD SG Angel Gurra)
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Huge country differences in levels of income inequality

1:27

1:15
Income gap between poorest and richest 10%

1:9

Source: OECD 2011, Divided we Stand. Note: Incomes are net incomes of the working-age population.
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Perceived and observed inequality: no correlation but country groupings

Continental Europe, Eastern Europe I

Southern Europe, Eastern Europe II

Perceived inequality

Nordic countries

English speaking countries

Actual inequality (Gini)

Income inequality increased in most OECD countries ..

Source: OECD 2011, Divided we Stand. Note: Incomes are net incomes of the working-age population.
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.. and it increased in traditionally egalitarian countries, too

Source: OECD 2011, Divided we Stand. Note: Incomes are net incomes of the working-age population.
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.. Hungary recorded several episodes in income inequality development

Source: OECD 2011, Divided we Stand. Note: Incomes are net incomes of the working-age population.
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Diagnosis Income inequality increased in both high- and low-inequality countries alike; Income inequality increased during both recession and boom periods; Income inequality increased despite employment growth up to the recession. So what happened? Developments in labour earnings and labour markets are the main driver.
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Causes of growing inequalities: The major strands of explanation Globalisation, brought by rapid economic integration; Skill-biased technological changes; Institutional and regulatory reforms;

Changes in employment patterns;

Changes in family formation and household structures;

Changes in tax and benefit systems.

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OECD evidence on main drivers of inequality

Globalisation (trade, FDI, financial liberalisation) had little impact on wage inequality trends per se but put pressure on policies and institutional reforms; Such institutional and regulatory reforms aimed at promoting growth and productivity while they had a positive impact on employment, at the same time have been associated with increased wage inequality;

Changes in technology: technical progress was more beneficial for high-skilled workers
Increases in human capital off-set much of the drive towards rising inequality.
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Main drivers of changes in earnings distribution among the w/a-population

Impact of: Trade integration FDI Technological progress Declining union coverage Product market deregulation Weaker EPL for temporary workers Declining tax wedge Declining UB for low-wage workers Up-skilling (increased education levels)
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Employment

Wage dispersion

Estimated overall earnings inequality

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= = + =/+/ = / + =/+/=/--

OECD evidence on main drivers of inequality (cont.)

Changes in working conditions: part-time work and non-standard labour contracts increased;

Changes in working hours: many countries saw an increasing divide in hours worked between high- and low-wage workers;
Changes in household structure: more people living on their own or with partners in the same earnings bracket.

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Accounting for part-timers and selfemployed increases earnings inequality

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Source: OECD 2011, Divided we Stand

Hours worked decreased most among low-wage workers

Trends in annual hours worked by earnings group, mid-1980s to mid-2000s

Source: OECD 2011, Divided we Stand

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Redistribution through taxes and benefits plays an important role

Market incomes are distributed more unequally than household net incomes: taxes and benefits reduce inequality by a quarter

Source: OECD 2011, Divided we Stand. Note: Data refer to the working-age population.
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.. but redistribution became weaker in most countries

How much of the increase in market income inequality since 1985 was offset by income taxes and cash transfers?

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Source: OECD 2011, Income Distribution Database

Why have tax/benefit systems become less successful at reducing inequality?

While overall redistribution has increased, this was not enough to offset growing market-income inequality; Changes in overall redistribution were mainly driven by benefits: those became more redistributive during the 1990s but less effective since then;

Spending levels have been a more important driver of these changes than tighter targeting;
Spending shifted towards inactive benefits, leading to reduced activity rates and higher market-income inequality.
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Social services also redistribute income

Education, health, care etc. reduce inequality by a fifth

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Source: OECD 2011, Divided we Stand. Note: Services include public services for education, health, social housing, child care and elderly care.

Policy implications for OECD countries

More and better jobs: Increasing employment may contribute to sustainable cuts in income inequality, provided employment gains occur in jobs that offer career prospects; Facilitate and encourage access to employment for underrepresented groups: address labour market segmentation; Promote up-skilling of the workforce: better training and education for the low-skilled; Guarantee access to high-quality public services; Government transfers (cash and in-kind) have an important role to play to safeguard low-income households; Scope for reviewing some tax provisions beyond effects on incentives and revenues. Both redistribution and inclusive employment policies matter.
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Thank you for your attention !

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www.oecd.org/els/social/inequality

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Overview of income inequality among the working-age population: a traffic light

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