reconciling inequality and growth objectives: can it be done?
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Reconciling inequality and growth objectives: can it be done?
Isabell Koske
OECD, Economics Department
23 January 2012
Background of the study
Economic context
• Income inequality was high and rising in many OECD countries even before the crisis.
• Possible trade-offs and/or complementarities between growth and inequality goals.
Main objective of the study:
• Identifying win-win policies that help foster growth and reduce income inequality, but also those that entail trade-offs between the two objectives.
Co
nte
xt
Inequality in household disposable income varies considerably across countries.
Gap between the 10th and the 90th centile and the Gini index Household disposable income in the late 2000s
Inco
me
ineq
ual
ity –
an o
verv
iew
0.0
0.1
0.2
0.3
0.4
0.5
0.6
0
1
2
3
4
5
6
7
8
9
10
DN
KC
ZEN
OR
SVN
SVK
HU
NFI
NSW
EA
UT
ISL
BEL
NLD
FRA
LUX
DEU
CH
EG
RC
PO
LN
ZLC
AN
EST
OEC
DIT
AIR
LA
US
ESP
GB
RKO
RP
RT
JPN
USA
TUR
ISR
CH
LM
EX
Centile ratio (left scale) Gini coefficient (right scale)
Understanding inequality: accounting framework and policy levers
Individual
labour income
Household
labour income
Household
market income
Household disposable
income
Household adjusted
disposable income
Family formation
and composition
Self-employment
& capital income
Taxes & cash
transfers
Individual consumption
of public goods
Education & labour market policies, migration & gender policies etc.
Cash transfers and tax policies
Education & health (access & coverage) policies
Tax policies (wealth, capital income)
Family policies (child and elderly care), etc.
Inco
me
ineq
ual
ity –
an o
verv
iew
The sources of inequality in household labour income vary across countries.
The
dis
trib
uti
on
of
lab
ou
r in
com
e
0.20
0.25
0.30
0.35
0.40
0.45
0.50
0.55
0.60
0.65
0.70
0.75
CH
E
BEL
DN
K
SWE
FIN
SVK
CZE
NO
RFR
AIS
LSV
NA
US
DEU IT
A
NLD ES
P
EST
HU
N
AU
TO
ECD
JPN
LUX
IRL
ISR
KOR
GB
RG
RC
PO
LC
AN
PR
TC
HL
USA
BR
A
Indivdiual labour income (full-time employed)Individual labour income (working-age population)Household labour income
Labour income inequality in the OECD Gini coefficients, late 2000s
Where in the distribution are individual labour earnings most dispersed?
Centile ratio 90/50
The
dis
trib
uti
on
of
lab
ou
r in
com
e
0.0
0.5
1.0
1.5
2.0
2.5
3.0
BEL
SWE
FRA
ITA
FIN
CH
E
PR
T
NO
R
NZL
DN
K
GR
C
JPN
NLD ES
P
OEC
D
AU
T
PO
L
CZE
AU
S
HU
N
ISL
GB
R
IRL
ISR
CA
N
DEU
KOR
USA
0.0
0.5
1.0
1.5
2.0
2.5
3.0
NO
R
ITA
SWE
BEL
DN
K
FIN
NLD IS
L
DEU CZE
CH
E
JPN
NZL
CA
N
AU
S
AU
T
OEC
D
ESP
GB
R
FRA
IRL
GR
C
PO
L
KOR
USA
HU
N
ISR
PR
T
Labour income inequality among full-time employees, 2008 Centile ratio 50/10
Workers in the financial sector enjoy an income premium, particularly at the top.
Income premium of working in financial intermediation rather than in manufacturing
Cross-country average, 2008 or latest available year
The
dis
trib
uti
on
of
lab
ou
r in
com
e
0%
10%
20%
30%
40%
50%
60%
10 20 30 40 50 60 70 80 90
Income quantile
Higher union membership tends to be associated with lower wage dispersion.
Wage premium of union membership Cross-country average, 2008 or latest available year
The
dis
trib
uti
on
of
lab
ou
r in
com
e
-10%
0%
10%
20%
30%
40%
10 20 30 40 50 60 70 80 90
Income quantile
Taxes and transfers reduce market income inequality by about one-fourth.
The
tax
and
tra
nsf
er s
yste
m
Gini coefficient of market income and disposable income Late 2000s
0.00
0.05
0.10
0.15
0.20
0.25
0.30
0.35
0.40
0.45
0.50
0.55
SVN
DN
KC
ZESV
KN
OR
BEL FIN
SWE
AU
TC
HE
LUX
FRA
NLD
DEU
KOR
ISL
OEC
DES
TP
OL
ESP
NZL
JPN
AU
SC
AN
ITA
GB
RP
RT
ISR
USA
CH
L
Market income Disposable income
In most, but not all countries the redistributive impact of transfers is higher than that of taxes
The
tax
and
tra
nsf
er s
yste
m
The redistributive impact of taxes and transfers Point reduction in concentration coefficients, late 2000s
0.00
0.02
0.04
0.06
0.08
0.10
0.12
0.14
0.16
0.18
FIN
DN
KIR
LC
ZESW
ED
EUG
BR
BEL
AU
SN
OR
SVN
EST
NZL
AU
TIT
ASV
KN
LDO
ECD
ISR
CA
NLU
XP
OL
PR
TU
SA JPN
FRA
ESP
CH
EIS
LC
HL
KOR
Household taxes Public cash transfers
The size and composition of public cash transfers vary across OECD countries.
Public cash transfers to households Percent of GDP, 2007
The
tax
and
tra
nsf
er s
yste
m
0
2
4
6
8
10
12
14
16
18
20
MEX
KOR
ISL
CH
LTU
RC
AN
AU
SU
SA EST
ISR
IRL
NZL
SVK
GB
RN
LDN
OR
JPN
CH
EO
ECD
CZE
LUX
DN
KSW
EES
PSV
NG
RC
POL
FIN
HU
ND
EU PRT
BEL ITA
FRA
AU
S
Old age Incapacity Family Unemployment Other social policy areas
0
10
20
30
40
50
60
DN
KSW
EIT
AB
ELN
OR
AU
TFI
NFR
AH
UN
NLD
LUX
SVN
DEU ES
TC
ZEG
BR
ISL
OEC
DC
AN
PO
LN
ZL ISR
ESP
PR
TG
RC
CH
ESV
KIR
LJP
NA
US
KOR
TUR
USA
Personal income taxes Corporate income taxesSSCs and payroll taxes Taxes on goods and servicesOther Progressivity of household taxes (right axis)
% of GDP
The redistributive impact of the tax system is a function of its size and progressivity.
The
tax
and
tra
nsf
er s
yste
m
Size and composition of total tax revenues 2009
Measures to improve human capital are clear win-win strategies.
Imp
act
of
po
licie
s
A rise in: Employment
rate Earnings equality
Labour income equality
GDP per capita
Equity in education ? + + +
Upper-secondary and tertiary graduation rates
? + + +
Initiatives to foster the integration of immigrants
+ + + +
Initiatives to raise female labour force participation
+ + + +
Initiatives to combat discrimination
+ + + +
In the area of labour and product markets, the equality effects depend on the precise measure.
A rise in: Employment
rate Earnings equality
Labour income equality
GDP per capita
Minimum wage (relative to median wage)
0/- + ? 0/-
Unionization ? + + ?
Legal extensions of collective wage agreements
- ? - -
The gap between protection on regular vs. temporary work
- - - -
Product market regulation - 0/+ ? -
Imp
act
of
po
licie
s
Many tax policies imply trade-offs with respect to the growth and distribution objectives.
Revenue-neutral tax changes: Disposable
income equality
GDP per capita
Change tax mix from income to consumption tax
- +
Change tax mix from income to real estate tax
- +
Change tax mix from income to wealth and inheritance tax
? +
Increasing top PIT rates and tax free allowances
+ ?
Cutting tax expenditures and marginal rates
+ +
Imp
act
of
po
licie
s
Contact information and underlying documents.
Contact person • Isabell Koske ([email protected])
Webpage
• www.oecd.org/economy/goingforgrowth/inequality.
Going for Growth 2012
• Reducing income inequality while boosting economic growth: can it be done?, Chapter 5
OECD Economics Department Policy Notes Series
• Policy Note No. 8: Inequality in labour income – What are its drivers and how can it be reduced?
• Policy Note No. 9: Income inequality and growth – The role of taxes and transfers Fu
rth
er in
form
atio
n
OECD Economics Department Working Paper Series
Working Paper Series on “Less income inequality and more growth – Are they compatible? ”
• WP 924: Part 1. Mapping income inequality across the OECD • WP 925: Part 2. The distribution of labour income • WP 926: Part 3. Income redistribution via taxes and transfers across
OECD countries • WP 927: Part 4. Top incomes • WP 928: Part 5. Poverty in OECD countries • WP 929: Part 6. The distribution of wealth • WP 930: Part 7. The drivers of labour earnings inequality – An
analysis based on conditional and unconditional quantile regressions • WP 931: Part 8. The drivers of labour income inequality – A review of
the recent literature
Furt
her
info
rmat
ion