Economic Growth

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Economic Policy Reforms 2012 Going for Growth © OECD 2012

PART II

Chapter 5

Reducing income inequality while boosting economic growth: Can it be done?

This chapter identifies inequality patterns across OECD countries and provides new analysis of their policy and non-policy drivers. One key finding is that education and anti-discrimination policies, well-designed labour market institutions and large and/or progressive tax and transfer systems can all reduce income inequality. On this basis, the chapter identifies several policy reforms that could yield a double dividend in terms of boosting GDP per capita and reducing income inequality, and also flags other policy areas where reforms would entail a trade-off between both objectives.

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II.5.

REDUCING INCOME INEQUALITY WHILE BOOSTING ECONOMIC GROWTH: CAN IT BE DONE?

Summary and conclusions
In many OECD countries, income inequality has increased in past decades. In some countries, top earners have captured a large share of the overall income gains, while for others income has risen only a little. There is growing consensus that assessments of economic performance should not focus solely on overall income growth, but also take into account income distribution. Some see poverty as the relevant concern while others are concerned with income inequality more generally. A key question is whether the type of growth-enhancing policy reforms advocated for each OECD country and the BRIICS in Going for Growth might have positive or negative side effects on income inequality. More broadly, in pursuing growth and redistribution strategies simultaneously, policy makers need to be aware of possible complementarities or trade-offs between the two objectives. This chapter sheds new light on this issue, following up on recent OECD work (OECD, 2011). It first highlights differences in income inequality across the OECD and the factors driving them, such as cross-country differences in wage and non-wage income inequality, as well as in hours worked and inactivity. The chapter then provides new analysis of the policy and non-policy determinants of overall income inequality, assessing separately the drivers of labour income inequality and the redistributive role of tax and transfer systems. In each case, the analysis identifies “win-win” policies that can both reduce inequality and promote economic growth, and also highlights policies that may entail trade-offs between the two policy goals. OECD countries can be divided into five groups according to their patterns of inequality. For example, in five English-speaking countries (Australia, Canada, Ireland, New Zealand and the United Kingdom) and the Netherlands wages are rather dispersed and the share of part-time employment is high, driving inequality in labour earnings above the OECD average. Means-tested public cash transfers and progressive household taxes reduce overall income inequality, but it remains above the OECD average. At the other end of the scale, four Nordic countries and Switzerland all have comparatively low labour income inequality because wage dispersion is narrow and employment rates are high. Cash transfers tend to be universal and are thus less redistributive. Income inequality for this group is considerably below the OECD average. This chapter also presents new empirical analysis which shows that although technological change and globalisation have played a role in widening the distribution of labour income, the marked cross-country variation is likely due to differences in policies and institutions. This leads to the following conclusions about policies and institutions: ●

Education policies matter. Policies that increase graduation rates from upper secondary and tertiary education and that also promote equal access to education help reduce inequality. Well-designed labour market policies and institutions can reduce inequality. A relatively high minimum wage narrows the distribution of labour...
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