Wednesday, May 4, 2011

Not Just a US Phenomenon: Income Inequality Increasing Everywhere

This new article from the OECD about rising income inequality among member nations is getting a lot of attention in the economics blogs.  Here is the figure everyone is posting:

From the report:

What drives growing earnings and income disparities?

The rise of earnings and income inequality occurred in most countries during periods of sustained economic growth, which raises the question why not everybody benefited from growth in the same way. While it is difficult to assess fully the role of many potential driving forces, the following factors have often been identified as having the most important impacts on widening inequality in OECD countries:

  • Globalisation, skill-biased technological progress and institutional and regulatory reforms haveall had an impact on the distribution of earnings;
  • Changes in family formation and household structures have had an impact on household earnings and income inequality;
  • Tax and benefit systems have changed in the ways they redistribute household incomes.

A forthcoming OECD study assesses the relative roles of these different factors. The study first examines how trends in globalisation, technological change and regulatory and institutional reforms have affected inequalities in wages and earnings. Then, it analyses the extent to which trends in labour earnings inequality have translated into changes in income inequality. Finally, the study examines possible reasons for changes in the redistributive effectiveness of tax/transfer systems over time.

The report then goes on to discuss policy responses:

Which lessons for policies?

Reforming tax and benefit policies is the most direct and powerful instrument to increase redistributive effects. Large and persistent losses of low-income groups following recessions underline the importance of well-targeted income-support policies. Government transfers – both in cash and in-kind – have an important role to play to guarantee that low-income households do not fall further back in the income distribution.

At the other end of the income spectrum, the relative stability of higher incomes – and their longer- term trends – is important to bear in mind in planning reforms of redistribution policies more broadly. It may be necessary to review whether existing tax provisions are still optimal in light of equity considerations and current revenue requirements. This is especially the case where the share of overall tax burdens borne by high-income groups has declined over recent years (e.g., because of non-compliance, cuts in marginal income taxes or because tax expenditures mainly benefit high-income groups).

However, redistribution strategies based on government transfers and taxes alone would be neither effective nor financially sustainable. A key challenge for policy is to facilitate and encourage access to employment for under-represented groups. This requires not only new jobs, but jobs that enable people to avoid and escape poverty. Recent trends towards higher rates of in-work poverty indicate that job quality has become a concern for a growing number of workers. Policy reforms that tackle inequalities in the labour market, such as those between standard and non-standard forms of employment, are needed to reduce income inequality.

Policies that invest in human capital of the workforce are needed. This requires better training and education for the low-skilled. The latter would serve to boost their productivity potential and future earnings. Over the past two decades, the trend to increased education attainment has been one of the most important elements in counteracting the underlying increase in wage inequality in the longer run. Policies that promote the up-skilling of the workforce are therefore key factors to reverse the trend to further growing inequality.



Cameron Mulder said...

Have you read the book The Spirit Level: Why Greater Equality Makes Societies Stronger?

I am curious to hear your take on it.

Patrick Emerson said...

I have not read it (nor heard of it) but the connection between inequality and lots of economic and social measures is still a big question.