Income Inequality Does Hurt Economic Growth

The Organisation for Economic Co-operation and Development (OECD) Directorate for Employment, Labour and Social Affairs, has released a report stating that income inequality does hurt economic growth. That is when income inequality rises, economic growth falls.

They point out that today the richest 10% of the population in the OECD area earn 9.5 times more than the poorest 10%, versus 7 times more in the 1980s. And also that while the have made gains, the bottom 10% have grown much slower during those times and fallen during bad times.

Not only is the gap widening, as the OECD states, but the also in the Gini coefficient. The Gini coefficient is a broader measure of inequality, which ranges from 0 to 1, where everybody has identical incomes, to 1, where all income goes to only one person. The rate was ).29 in the 1980s and stands at 0.32 by the end of 2011. It was developed by the Italian statistician and sociologist Corrado Gini and published in his 1912 paper “Variability and Mutability.”

The Gini coefficient increased in 16 of the 21 OECD countries for which long time series are available. In Finland, Israel, New Zealand, Sweden and the U.S. it more than 5 points, while only falling slightly in Greece and Turkey.

The paper says, “new OECD analysis suggests that the income inequality has a negative and statistically significant impact on medium-term growth.”

“The OECD recommends three types of policy intervention to reduce inequality, which can be implemented in different mixes depending on the socioeconomic conditions and policy preferences in different countries,” Forster said. The three pillars are: an inclusive labor market – e.g. Structuring labor markets to ensure low unemployment. Investments in human capital – which means good skills training and education programs. And finally, redistribution of some of society’s wealth or income toward the relatively poor through serious transfer programs,” he explained.

– Sources

*** Note:  All blogs are a work in process ***


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