Home > Growth, Inequality > Does inequality impact growth levels?

Does inequality impact growth levels?

December 10, 2014 Leave a comment Go to comments

Interesting report from the OECD that was published yesterday. There are a couple of good graphs that can be used for teaching inequality: The increase in inequality from 1985 – 2011; and the impact that inequality has on growth.

The Gini coefficient increased in 16 out of the 21 OECD countries for which long time series are available, rising by more than 5 points in Finland, Israel, New Zealand, Sweden and the United States and falling slightly only in Greece and Turkey (Figure 1).

Inequality OECD 1985-2011

The OECD estimate that increasing inequality by 3 Gini points (that is 0.03) points would drag down economic growth by 0.35 percentage point per year for 25 years: a cumulated loss in GDP at the end of the period of 8.5 per cent. Figure 2 below shows the that the increasing levels of inequality are estimated to have reduced growth levels in the majority of countries. Those of note are:

New Zealand -15%
Mexico -12%
UK -9%
Finland -9%
Norway -9%
Sweden -8%
Italy -7%
USA -6%

The graph also shows that greater equality prior to the crisis helped increase GDP per capita in Spain, France and Ireland.

Inequality OECD 2014

Key Findings from OECD Report

* The gap between rich and poor is now at its highest level in 30 years in most OECD countries.
* This long-term trend increase in income inequality has curbed economic growth significantly.
* While the overall increase in income inequality is also driven by the very rich 1% pulling away, what matters most for growth are families with lower incomes slipping behind.
* This negative effect of inequality on growth is determined not just by the poorest income decile but actually by the bottom 40% of income earners.
* This is because inter alia people from disadvantaged social backgrounds underinvest in their education.
* Tackling inequality through tax and transfer policies does not harm growth, provided these policies are well designed and implemented.
* In particular, redistribution efforts should focus on families with children and youth, as this is where key decisions on human capital investment are made and should promote skills development and learning across people’s lives.

You can view the full document at:

OECD – Does income inequality hurt economic growth?

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  1. February 26, 2015 at 5:35 pm

    The reasoning whereby the OECD finds a link between inequality and growth is by linking to credit constraints on human capital investments by the lower middle class. This analysis is rather stretched given the wide availability of student loans and interest-free rates.

    Furthermore, human capital has been taking a bit of a battering in terms of having any simple relationship with economic growth rates of late in the empirical literature. Indeed, people strive to find any sort of spillovers and human capital at all.

    Most of all, inequality in New Zealand has been pretty stable for 20 years. The entire spike in inequality that is measured in the OECD date was in the late 1980s. That’s a long shadow to go riding out on.

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