Reforms required by the economic crisis should be used to fight rising income inequality, with policies that simultaneously curb the gap between rich and poor, while also boosting economic growth, suggests new research from the Organization for Economic Co-operation and Development.
The OECD’s chief economist, Pier Carlo Padoan, says that, “Rising inequality is one of the major risks to our future prosperity and security. The main challenge facing governments today is implementing reforms that get growth back on track, put people to work and reduce the widening income gap.”
But the group suggests that governments can meet that challenge. And it says that the economic crisis, which is forcing cash-strapped governments to re-think tax and benefit systems, should be seen as an opportunity to address inequality and growth issues simultaneously.
The report finds that OECD countries can be divided into five groups according to their patterns of inequality. It groups Canada with Australia, Ireland, New Zealand, the UK, and the Netherlands, as countries where “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.”
On the policy front, the OECD says that many policies generate a double dividend as they reduce income inequality while at the same time boosting long-run GDP per capita. “Examples include facilitating the accumulation of human capital, making educational potential less dependent on personal and social circumstances, reducing labour market dualism or promoting the integration of immigrants and fostering female labour market participation.”
Other policies may entail a trade-off between reducing income inequality and raising GDP. For example, shifting the tax mix to away from labour and corporate income taxes towards consumption and real estate taxes, would improve incentives to work, save and invest, but could undermine equity, it says.
And, policies aimed at boosting GDP could hurt income inequality. “For instance, avoiding too-high and long-lasting unemployment benefits may raise employment over the long run but also widen the distribution of income among workers, with an ambiguous net effect on inequality.”
To benefit both GDP and income inequality, the OECD says that a priority should be the reduction or elimination of tax breaks that primarily benefit the well-off, which would create space for growth-friendly reductions in marginal tax rates for all taxpayers.
Additionally, it says that labour market reforms can provide similar dual benefits. Reducing the gap in employment protection between temporary workers and those on permanent contracts would reduce the average 25% wage differential between these two types of employees, while boosting employment and growth, the OECD suggests.
It also notes that providing more affordable child care will similarly improve labour force participation rates and incomes for women. And, it recommends improving educational outcomes, particularly for immigrants and socio-economically disadvantaged populations, which it says will have long-term impacts on their employment opportunities, incomes and inequality.
Removing product market regulations that stifle competition can reduce labour income inequality by boosting employment, the report says, but it adds that the empirical evidence for the link between product market reform and the dispersion of earnings is rather mixed.