INCOME INEQUALITY, REDISTRIBUTION AND

SOCIAL PROTECTION IN THE OECD AREA

Michael Förster

Directorate for Employment, Labour and Social Affairs,Social Policy Division

www.oecd.org/social/inequality.htm

2nd European-Latin America Economic ForumEurope and Latin America in the wake of global paradigm shifts

and new trends in the world economy20 – 21 May 2014

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1. TRENDS: How have income inequalities developed over the longer run and during the Great Recession?

2. CAUSES: What are the major underlying forces behind increases in inequality?

3. REMEDIES: Which policies are most promising to counter increases in inequality?

Questions addressed in recent OECD work (Growing Unequal?, Divided We Stand..)

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Large country differences in levels of income inequality

Data refer to 2011 or latest year available. Source: OECD Income Distribution Database (www.oecd.org/social/inequality.htm).Note: the Gini coefficient ranges from 0 (perfect equality) to 1 (perfect inequality). Gaps between poorest and richest are the ratio of average income of the bottom 10% to average income of the top 10%. Income refers to cash disposable income adjusted for household size.

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Income inequality before and since the Great Recession: the facts

Long-term trends in inequality of disposable income (Gini coefficient)

Source: OECD Income Distribution Database, www.oecd.org/social/income-distribution-database.htmNote: Income refers to disposable income adjusted for household size.

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.. only a few countries with high starting levels recorded drops in inequalityLong-term trends in inequality of disposable income, cont.

Source: OECD Income Distribution Database, www.oecd.org/social/income-distribution-database.htmNote: Income refers to disposable income adjusted for household size.

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In some countries, 20% and more of long-term growth has been captured by the top 1%

Share of income growth going to income groups from 1975 to 2007

Source: OECD 2014, Focus on Top Incomes and Taxation in OECD Countries: Was the Crisis a Game Changer? Based on World Top Income Database. Note: Incomes refer to pre-tax income, excluding capital gains.

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• Income inequality increased in a large majority of OECD countries over the past 2-3 decades, including in traditionally more equal countries;

• Only a few high-inequality countries bucked the trend (mainly LAC): there was thus some convergence towards higher inequality across OECD countries;

• Income inequality increased during both recession and boom periods and despite employment growth, up to the recession;

• In many countries, income inequality increased especially at the top;

• OECD countries recorded a historically high level of inequality as they were shattered by the crisis in 2008.

Summary of the key stylised facts on trends in income inequality over the past 3 decades

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No direct effect:– Globalisation (trade, FDI)

Ambiguous effects:– Changes in regulations and institutions

Lesser culprit:– Changing household/family structures

Main culprits:– Skill-biased technological changes– Changes in employment patterns and working conditions– Weaker redistribution via the tax/benefit system

Off-setting factor:– Increase in education levels off-set much of the drive towards

rising inequality

OECD evidence on the main drivers of rising inequality in OECD countries

9/20Source: OECD 2013, Crisis squeezes incomes and puts pressure on inequality and poverty. Note: Data refer to the working-age population.

Inequality of (gross) market and disposable (net) income, working-age persons

Redistribution through taxes and benefits plays an important role in almost all OECD countries

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Among the two instruments, cash transfers play a more significant role, especially in Europe

Source OECD 2014, preliminary data. Note: Data refer to the working-age population.

Respective redistributive effects of direct taxes and cash transfers, 2011

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.. but redistribution became weaker in most OECD countries until the onset of the crisis

Source: OECD Income Distribution Database, www.oecd.org/social/income-distribution-database.htm

Percentage reduction of income disparity through taxes and transfers, working-age persons

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• Changes in overall redistribution were mainly driven by benefits: taxes also played a role, but to a lesser extent;

• Spending levels have been a more important driver of these changes than tighter targeting of benefits;

• Spending shifted towards “inactive” benefits, leading to reduced activity rates and higher market-income inequality.

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

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Social services taken together have an important redistributive impact

• With 13% of GDP, in-kind transfers are higher than all cash transfers together (11%)

– Highest in Sweden and Denmark (20%), lowest in Estonia and Slovak Republic (10%)

• If services were imputed in income, household resources would increase by 28%, …

• … inequality would decrease by one fifth,...

• … and poverty would fall by 40% (or more).

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Public services reduce inequality by a fifth, on average

Household income inequality (Gini coefficients) before and after accounting for public services

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

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• In many countries, the welfare state has prevented income inequality going from bad to worse in the first years of the Great Recession (2007 – 2010)…

• …but as the jobs crisis persists and fiscal consolidation takes hold, there is a growing risk of further rising inequality and poverty.

Income distribution trends during the crisis in the OECD area: The bottom line

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During the 1st phase of the crisis, market income inequality rose considerably

Source: OECD Income Distribution Database, www.oecd.org/social/income-distribution-database.htm Note: Data refer to the working-age population.

Percentage point changes in inequality of household market and disposable income, 2007 - 2010

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Initial crisis response raised social protection

Changes to redistribution policies, mid-2008 – 2010

Source: OECD (2011), Economic Crisis and Beyond: Social Policies for the Recovery. OECD Ministerial Meeting on Social Policy.

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Social transfers are more often part of consolidation plans than other areas of public spending

Source: OECD 2014, Society at a Glance, www.oecd.org/fr/social/panoramadelasociete.htm Reading note: 70% of ocuntris have vplanned to cut welfare spending on working-age transfers in 2012.

Major programme measures in fiscal consolidation plans, by area of public spending: percent of countries participating

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Both redistribution and inclusive employment policies matter

Three main policy avenues to tackle too-high inequality:

• Reforming tax and benefit systems : Government transfers (cash and in-kind) have an important role to play to safeguard low-income households.There is also scope for reviewing some tax provisions in light of increased “tax capacity" among top-income households;

• Boosting employment and career prospects (“more and better jobs”) : Facilitate and encourage access to employment for under-represented groups and address labour market segmentation;

• Investing in human capital: Promote up-skilling of the workforce, better training and education for the low-skilled.

Policy lessons from OECD work

Thank you for your attention!

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