According to the new OECD report inequality has become a universal concern, among both policy makers and societies at large. Today in advanced economies, the average income of the richest 10% of the population is about nine times that of the poorest 10%. Even in traditionally egalitarian countries – such as Germany, Denmark and Sweden – the income gap between rich and poor is expanding.
Only a few countries have been able to buck this trend: income inequality has recently fallen in Chile and Mexico, but the richest in these two countries still have incomes more than 25 times those of the poorest.
In emerging economies, economic growth has helped to reduce sharply the prevalence of poverty. But at the same time high levels of income inequality have risen further. Among the BRICs, only Brazil managed to reduce inequality substantially, although with a ratio of 50 to 1 it is still a far more unequal country than any of the OECD countries.
The economic crisis has added urgency to deal with the policy issues related to inequality. The social compact is starting to unravel in many countries. Young people who see no future for themselves feel increasingly disenfranchised. They have now been joined by protesters who believe that they are bearing the brunt of a crisis for which they have no responsibility, while people on high incomes appear to have been spared. From Spain to Israel, from Wall Street to Syntagma Square, popular discontent is spreading rapidly. Due to the crisis, uncertainty and inequality-related issues have reached the middle classes in many societies.
The challenges are clear, but it is less obvious what has caused such inequality and what can be done about it – and what polices are needed. This report aims to untangle the complex web of factors behind the growing gap between rich and poor. The single most important driver has been greater inequality in wages and salaries. This is not surprising: earnings account for about three-quarters of total household incomes among the working-age population in OECD countries in most cases. The earnings of the richest 10% of employees have taken off rapidly, relative to the poorest 10% in most cases.
The labour market should therefore be the first place to act. Finding the right counterbalance to rising income inequality requires an understanding of why wages are becoming more polarised. Technological progress has been a motor for economic growth, but not all workers have been able to benefit in the same way. We have to acknowledge that better-educated, higher-earning workers have reaped higher gains while those with lower skills have been left behind. The rise of the share going to the top earners is also the result of companies operating in a global market for talent, a spectacular rise in pay of executives and bankers, and of the emergence of a winner-takes-all culture in many countries.
You can read the report here.
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