Wednesday, 11 May 2011

Why it’s getting harder to be really rich

This post first appeared on OECD Insights 10 May 2011

by Brian Keeley

Seventy million pounds – or about $114 million: That’s how much you now need to get on to The Sunday Times “rich list” (subscribers only) in the UK. A pretty steep entry barrier and, perhaps surprisingly, it’s even higher than it was before the crisis: Just three years ago, a mere £55 million would have won you a place among the UK’s wealthiest.   

That’s further evidence that the gap between the incomes of the richest and the poorest is widening. But as a recent OECD paper demonstrates, it’s not happening just in the UK. Income inequality has risen in all but a handful of OECD countries, says the paper, which offers preliminary findings ahead of a fuller report later this year. On average, the richest 10% of people are about nine times better off than the poorest 10% in OECD countries, a ratio of 9 to 1. The gap is lower in Scandinavian countries – about 5 to 1 – but higher elsewhere: 14 to 1 in Israel, Turkey and United States and 27 to 1 in Mexico and Chile.

“With very few exceptions (France, Japan and Spain), wages of the 10% best-paid workers have risen relative to those of the 10% least-paid workers,” says the paper, and “top earners saw their incomes rising particularly sharply”.

As we noted recently on the blog, the trend is for the gap to grow, and “even in highly egalitarian places like Scandinavia”, as The Economist points out. One way to understand this is through the Gini coefficient a “measure of income inequality that ranges from zero, when everybody earns the same amount, to one, when all income goes to only one person”, as The Wall Street Journal explains. By that measure, income inequality in OECD countries has risen from 0.28 in the mid-1980s to 0.31 in the mid-2000s – an increase of 10%.
The rise is often blamed principally on a mix of globalization, which has led to a decline in manufacturing jobs in developed countries, and the emergence of the knowledge economy, which rewards people with higher levels of education. The OECD paper acknowledges that technological progress and globalisation have had an impact, but that their role has perhaps been overstated. It’s true that increased trade – a characteristic of globalization – has put pressure on the wages of lower-paid workers. But some of these downsides have probably been offset by rising capital flows – another feature of globalization – most notably a big increase in foreign investment.

Instead, the paper suggests the role of other factors may have been overlooked, notably the changing nature of taxes and benefits – in effect, the money governments collect in taxes and social security contributions from workers and then redistribute, directly and indirectly, as benefits to people in need. This system of redistribution reduces income inequality by a quarter in OECD countries, and by even more in some countries. But, the paper suggests, its impact has weakened over the past 10 to 15 years.  

Regulatory reforms – or changes to the rules covering everything from product monopolies to work contracts – have also played a role. On the one hand, these have brought benefits by bringing more people into labour force. On the other hand, says the paper, they “have also contributed to widening wage disparities, as more low-paid people were brought into employment and the high-skilled reaped more benefits from a more dynamic economy.”

And there’s been a change in who we marry: “Over the years people have become more and more likely to marry mates who have similar incomes,” says The New York Times . By contrast,  when richer and poorer people wed, it tends to spread out the benefits of higher incomes more widely in society.
So what can be done? OECD Secretary-General Angel Gurría clearly believes action is needed: “Halting the scary outlook of increasing inequality is more urgent than ever,” he said at a recent OECD policy forum  devoted to the issue.

Based on its examination of the causes of rising inequality, the OECD paper suggests taxes and benefits may need to be looked at again, especially in light of the fact that “the share of overall tax burdens borne by high-income groups has declined over recent years”. Action is also needed to ensure that people who aren’t currently working can find jobs, but “this requires not only new jobs, but jobs that enable people to avoid and escape poverty,” the paper says. And, it concludes, there needs to be a stronger focus on better training and education for low-skilled workers.

Useful links
OECD work on inequality

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