OECD study upends thinking on major election issue of inequality

Inequality, driven by a deterioration at the very bottom of the income ladder, is at a 30-year high.

An elderly woman. [illustrative] (photo credit: REUTERS)
An elderly woman. [illustrative]
(photo credit: REUTERS)
A study from the OECD on income inequality may have a striking impact on Israel’s election campaign.
The study, released Tuesday, found that larger economic gaps are bad for overall economic growth, a finding that upends common political debates that frame inequality as a trade-off for growth.
“This compelling evidence proves that addressing high and growing inequality is critical to promote strong and sustained growth and needs to be at the center of the policy debate,” said OECD secretary-general Angel Gurría. “Countries that promote equal opportunity for all from an early age are those that will grow and prosper.”
According to the study, the 3-point increase in the Gini coefficient (a measure of wealth distribution) over three decades in the OECD area cut overall GDP by 8.5%. That figure amounts to 0.25% less growth every year for 25 years.
Particularly troubling is the fact that inequality is at a 30-year high. The richest 10% in the OECD earns 9.5 times what the poorest 10% do, up from 7 times in the 1980s.
In some countries, the effects were far worse.
Increased inequality knocked 10 points off of Mexico’s GDP, close to 9 points from the UK, Norway and Finland, and 6 to 7 points from the US, Italy and Sweden. Likewise, countries that reduced their inequality saw gains to their economy.
The study’s findings will likely resonate with Israelis at the start of the election campaign.
In recent months, the economy has been moderating, a trend exacerbated by the tough summer war with Hamas. The cost of living has already taken center stage in the campaign.
Likewise, Israel has one of the highest levels of inequality relative to the OECD, coming in just behind the United States and a smattering of other countries such as Turkey and Mexico. Much of that gap comes from low levels of redistribution – Israel is closer to the middle of the pack in inequality before redistribution is taken into account.
The study found that redistribution per se does not affect economic growth, but it has to be targeted well.
The study found that the central mechanism linking inequality to reduced economic output is lack of education. The high levels of inequality in most places is driven by a deterioration at the very bottom of the income ladder (plus the increased wealth concentrated at the top 1%).
Society’s poorest have fewer opportunities for good education, which makes them less productive.
“The analysis suggests that inequality significantly shapes the opportunities of education and upward mobility of disadvantaged individuals,” the study found.
The study recommended policies that focus wealth redistribution on families with children and youth and promote skill development and education.