World of Work Report 2008: Income Inequalities in the Age of Financial Globalization

8/14/2019 World of Work Report 2008: Income Inequalities in the Age of Financial Globalization

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PREPR

INTED

ITION


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World of Work Report 2008


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INERNAIONAL LABOUR ORGANIZAIONINERNAIONAL INSIUE FOR LABOUR SUDIES

World of Work Report 2008Income Inequalities in the Ageo Financial Globalization

PREPRINT EDITION


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Copyrig Inernaional Labour Organizaion

Publicaion o e Inernaional Labour Of ce enjoy copyrig under Proocol o e Univeral Copyrig Conven-ion. Neverele or excerp rom em may be reproduced wiou auorizaion on condiion a e ourcei indicaed. For rig o reproducion or ranlaion applicaion ould be made o ILO Publicaion (Rig andPermiion) Inernaional Labour Of ce CH- Geneva Swizerland or by email: [email protected]. TeInernaional Labour Of ce welcome uc applicaion.

Librarie iniuion and oer uer regiered wi reproducion rig organizaion may make copie in accordancewi e licence iued o em or i purpoe. Vii www.irro.org o nd e reproducion rig organizaion in

your counry.

World o Work Repor Income Inequaliie in e Age o Financial Globalizaion

International Labour Of ce Genea: ILO, 2008

First published 2008

ISBN ----

Poocompoed in Swizerland WEIPrined in Swizerland ILO

Te deignaion employed in ILO publicaion wic are in conormiy wi Unied Naion prac-ice and e preenaion o maerial erein do no imply e expreion o any opinion waoeveron e par o e Inernaional Labour Of ce concerning e lega l au o any counr y area orerriory or o i auoriie or concerning e delimiaion o i ronier.

Te reponibiliy or opinion expreed in igned aricle udie and oer conribuion re olelywi eir auor and publicaion doe no coniue an endoremen by e Inernaional LabourOf ce o e opinion expreed in em.

Reerence o name o rm and commercia l produc and procee doe no imply eir endoremenby e Inernaional Labour Of ce and any ailure o menion a paricular rm commercia l producor proce i no a ign o diapproval.

ILO publicaion and elecronic produc can be obained roug major bookeller or ILOlocal of ce in many counrie or direc rom ILO Publicaion Inernaional Labour Of ceCH- Geneva Swizerland. Caalogue or li o new publicaion are available ree o cargerom e above addre or by email: [email protected]

Vii our webie: www.ilo.org/publn


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Who are the authors of World of Work Report 2008?

Te repor a been prepared by a o e Inernaional Iniue or LabourSudie and i publied under e reponibiliy o i Direcor.Caper auor are:

Seven obin Maieu Carpe Ekkeard Ern and Raymond orre(Caper )

Ekkeard Ern and Vernica Ecudero (Caper )

Lucio Baccaro (Caper )

Uma Rani Amara (Caper )

Naren Praad (Caper )

Seven obin and Maieu Carpe (Caper ).

Franz Eber Konanino Papadaki and Raymond orre providede analyi o execuive compenaion (Caper ) and i deerminan(Caper ). Judy Raery wa reearc aian or e projec.

Raymond orre Direcor o e Iniue edied and coordinaede repor.

Te International Institute for Labour Studieswa eablied by e InernaionalLabour Organizaion in a a cenre or advanced udie in e ocial and labour eldo urer a beer underanding o labour iue roug educaion and reearc.


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Chapter 1. Trends in employment and inequality . . . . . . . . . . . . . . . . 1

Main fndings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1Introduction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2A. Overview o recent developments and employment trends . . . . . . . . . . . . . . . . . . . 3B. rends in income inequality . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8C. Why is income inequality a matter o policy concern? . . . . . . . . . . . . . . . . . . . . . . 22D. Bottom line and rationale or the next chapters . . . . . . . . . . . . . . . . . . . . . . . . . . . . 29Appendix A. Regional country groupings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 30Appendix B. Calculation methods or wage dispersion, wage shares,

productivity and real wage growth . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 31Reerences . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 34

Chapter 2. The role of financial globalization . . . . . . . . . . . . . . . . . . 39

Main fndings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 39Introduction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 40A. Development o fnancial globalization and wealth inequality . . . . . . . . . . . . . . . 41

B. Financial markets and pro-poor growth . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 44C. Financial globalization, union bargaining power and the wage share . . . . . . . . . 50D. Financial globalization and the convergence o capitalisms . . . . . . . . . . . . . . . . . . 52E. Corporate governance and executive pay . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 56F. Policy considerations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 59Appendix A. Te impact o fnancial market crises on growth and inequality:

An empirical assessment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 60Appendix B. Empirical studies regarding pay or perormance . . . . . . . . . . . . . . . . . . . 62Reerences . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 65

Table of Contents

able o Contents


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World of Work Report 2008: Income Inequalities in the Age of Financial Globalization

Chapter 3. Labour institutions and inequality . . . . . . . . . . . . . . . . . . 71Main nding . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Inroducion . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . A. Review o earlier udie . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . B. Cro-counry paern o labour iniuion and income inequaliy . . . . . . . . . C. Policy conideraion . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Appendix A. Meaure o labour iniuion . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Appendix B. Do labour iniuion reduce inequaliy? An economeric analyi Appendix C. I e inequaliy-reducion eec o indurial relaion

iniuion wiering away in advanced counrie? . . . . . . . . . . . . . . . . Reerence . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Chapter 4. Employment patterns and income inequality . . . . . . . . . . . 115Main nding . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Inroducion . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . A. No clear link beween income inequaliy and employmen grow . . . . . . . . . . . B. Riing non-andard employmen a a acor o income inequaliy . . . . . . . . . . . C. Policy conideraion . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Reerence . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Chapter 5. Redistribution through taxes and social transfers . . . . . . . . 127Main nding . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Inroducion . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . A. Social raner axaion and income inequaliy: wa are e rend? . . . . . . . . B. o wa exen do axe and ocial raner ape income diribuion? . . . . . . C. Policy conideraion . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Reerence . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Chapter 6. Decent Work as a coherent policy package . . . . . . . . . . . . 153Inroducion . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . A. Link beween Decen Work and income inequaliy . . . . . . . . . . . . . . . . . . . . . . . . B. Policy coerence . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . C. Area or urer analyi . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Reerence . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .


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Table of Contents

List of tables, figures and boxes by chapter

FiguresChapter 1

Figure .. World employmen rend . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Figure .. Employmen grow and diperion . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Figure .. rend in emale employmen grow . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Figure .. Developmen o wage are by region - . . . . . . . . . . . . . . . . . Figure .. Average annual wage and produciviy grow per cen - Figure .. Gini index by region or and . . . . . . . . . . . . . . . . . . . . . . . . . . . Figure .. Cange in Gini index beween and . . . . . . . . . . . . . . . . . . . . Figure .. Raio o earning o op per cen earner vi--vi boom

per cen earner - . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Figure .. Evoluion o execuive pay veru average employee wage

in e Unied Sae - . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Figure .. Evoluion o execuive pay veru average employee wage

in e Neerland - . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Figure .. Eimaed decline in purcaing power o Indian urban oueold

reuling rom riing ood price . . . . . . . . . . . . . . . . . . . . . . . . . . . . Figure .. Eimaed decline in purcaing power o oueold

in e Unied Sae reuling rom riing uel price . . . . . . . . . . Figure .. Income inequaliy and iner-generaional mobiliy . . . . . . . . . . . . . . . . . . Figure .. Income inequaliy and corrupion . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Figure .. Income inequaliy and pending on eriary educaion . . . . . . . . . . . . . . Figure .. Income inequaliy and rend per capia GDP grow . . . . . . . . . . . . . . . Figure .. Income inequaliy and inabiliy o economic grow . . . . . . . . . . . . . .

Chapter 2

Figure .. De jure meaure o capial accoun opening . . . . . . . . . . . . . . . . . . . . . . . Figure .. Financial globalizaion in even world region (% o GDP) . . . . . . . . . . Figure .. Foreign direc invemen in even world region (% o GDP) . . . . . . . Figure .. Frequency o banking crie yemic or oerwie

in OECD counrie and e re o e world (%) . . . . . . . . . . . . . . . . . . Figure .. Developmen o curren accoun and wage are during nancial

crie in our counrie . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Figure .. Impac o nancial developmen and crie on inequaliy

and grow . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Figure .. Financial globalizaion and e evoluion o e wage are . . . . . . . . . Figure .B. Miery index . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Chapter 3Figure .. Bivariae correlaion beween average Gini coef cien

and average union deniy - . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Figure . . Bivariae correlaion beween average Gini coef cien and average

collecive bargaining rucure index - . . . . . . . . . . . . . . . . . . . Figure .. Bivariae correlaion beween average Gini coef cien and average

everiy core or Convenion No. - . . . . . . . . . . . . . . . . . . . Figure .. Bivariae correlaion beween average Gini coef cien and average

everiy core or Convenion No. - . . . . . . . . . . . . . . . . . . Figure .. Relaionip beween labour power and welare ae ize

in e period - and - . . . . . . . . . . . . . . . . . . . . . . . . . . Figure .. Relaionip beween welare ae ize and inequaliyin e period - and - . . . . . . . . . . . . . . . . . . . . . . . . . .


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Figure .. Parial correlaion beween inequaliy and labour powerconrolling or welare ae ize - . . . . . . . . . . . . . . . . . . . . . . . .

Figure .. Parial correlaion beween inequaliy and labour powerconrolling or welare ae ize - . . . . . . . . . . . . . . . . . . . . . . .

Figure .A. Average everiy core over ime Convenion No. . . . . . . . . . . . . . . . Figure .A . Average everiy core over ime Convenion No. . . . . . . . . . . . . . . .

Chapter 4Figure .. Average annual cange in income inequaliy and employmen . . . . . . Figure .. Par-ime and emporary work are on e rie in advanced counrie Figure .. rend in non-andard employmen in Cenral and Eaern

European counrie are mixed . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Figure .. Inormal employmen in Lain American counrie . . . . . . . . . . . . . . . . Figure .. Inormal employmen in eleced Aian counrie . . . . . . . . . . . . . . . . . . Figure .. Inormal employmen in eleced Arican counrie . . . . . . . . . . . . . . . . Figure .. Fixed-erm conrac pay le an permanen conrac . . . . . . . . . . . . . Figure .. Inormal ecor job pay le an ormal ecor job . . . . . . . . . . . . . . . . Figure .. Decompoiion o income inequaliy by oueold caraceriic

urban Cina and India . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Figure .. Income gap beween ormal ecor and inormal ecor oueold

in Lain America . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Chapter 5

Figure .. Social raner and income inequaliy . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Figure .. rend in pending on ocial raner (% GDP) . . . . . . . . . . . . . . . . . . . . Figure .. Educaion pending and inequaliy . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Figure .. rend in educaion and eal pending (% GDP) . . . . . . . . . . . . . . . . . Figure .. Global corporae ax rae - (%) . . . . . . . . . . . . . . . . . . . . . . . . .

Figure .. op marginal individual income axe worldwide (%) . . . . . . . . . . . . . . Figure .. VA rend in OECD counrie - . . . . . . . . . . . . . . . . . . . . . . Figure .. Inequaliy and rediribuion in OECD counrie and Figure .. Sare o axe and raner in rediribuion (%) . . . . . . . . . . . . . . . . . . . Figure .. Rediribuion and povery . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Figure .. Secoral conribuion o reduced income inequaliy lae available daa Figure .. Cange in inequaliy EPR and grow in counrie wi economie

in raniion - (%) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Figure .. Rediribuive impac (average) o raner and axe on inequaliy

in ix Lain American counrie . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Figure .. Abolue incidence o ocial ecuriy proviion in eig counrie

in Lain America (%) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Figure .. Social proecion expendiure by caegory in Aia and e Pacic (%) Figure .. Brazil: Cange in inequaliy employmen and grow - (%) Figure .. Malayia: Cange in inequaliy employmen and grow

- (%) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Chapter 6

Figure .. Principal componen analyi or ig per-capia GDP counrie . . . . Figure .. Principal componen analyi or medium

and low per-capia GDP counrie . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .


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Table of Contents

TablesChapter 1

able .. Execuive pay . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . able .. Increae in execuive pay componen Unied Sae -

per cen . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . able .. Increae in execuive pay componen Neerland -

per cen . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Chapter 2

able .. Weal inequaliy in eleced counrie . . . . . . . . . . . . . . . . . . . . . . . . . . . . able .. Rediribuion: inequaliy beore and aer axe . . . . . . . . . . . . . . . . . . . able .A. Deniion and Source o Variable ued in e Regreion Analyi able .A. Regreion reul . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Chapter 3

able .. Cro-counry ime-erie udie o e relaionip beweenindurial relaion iniuion and inequaliy . . . . . . . . . . . . . . . . . . . . .

able .. Cange in union deniy rae - . . . . . . . . . . . . . . . . . . . . . . . . . able .. Average collecive bargaining rucure and cange on a cale

o o - . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . able .A. Source o rade union deniy daa . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . able .B. Li o predicor and expeced impac on inequaliy . . . . . . . . . . . . . . . able .B. Deerminan o Gini: xed-eec model wi AR() error

inercep and ime dummie no repored . . . . . . . . . . . . . . . . . . . . . . . . . . able .B. Impac o globalizaion on union deniy rae: xed-eec model

wi AR() error inercep and ime dummie no repored . . . . . . . . able .B. Deerminan o Gini coef cien: beween eec

(conan no repored) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

able .C. Deerminan o e Gini coef cien in advanced counrie (xedeec wi AR() error ime dummie and conan no repored) able .C. Principal componen analyi o labour power: one componen

reained obervaion . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . able .C. Principal componen analyi o welare ae ize: one componen

reained obervaion . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . able .C. Principal componen analyi o inequaliy . . . . . . . . . . . . . . . . . . . . . . . . . able .C. Deerminan o inequaliy in advanced counrie (-)

beween regreion (conan no repored) . . . . . . . . . . . . . . . . . . . . . . . able .C. Deerminan o inequaliy in advanced counrie (-)

beween regreion (conan no repored) . . . . . . . . . . . . . . . . . . . . . . . .

Chapter 5able .. Inequaliy and rediribuion in counrie wi economie

in raniion . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . able .. Average grow rae Mauriiu . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . able .. Income inequaliy and povery in Mauriiu by oueold . . . . . . . . . .

Chapter 6able .. Succeul employmen perormer: wo illuraive model . . . . . . . . .


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BoxesChapter 1

Box .. Meauremen o income inequaliy . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Box .. Meauremen o execuive pay: meodological iue . . . . . . . . . . . . . . . . . Box .. Inequaliy and reorm: Experience in Bolivia and e Republic

o Sou Korea . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Chapter 2Box .. Sovereign weal und and global capial ow . . . . . . . . . . . . . . . . . . . . . . . Box .. Co o nancial crie in individual counrie e Aian crii . . . . . . . Box .. Imporing macroeconomic dicipline: Economic and ocial co

and bene in Argenina and Ecuador . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Chapter 5

Box .. Te role o educaion and eal . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Box .. Brazil . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Box .. Malayia . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Box .. Mauriiu . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Chapter 6Box .. Analying e link beween income inequaliy and Decen Work . . . . .


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1

Main findings

Te ongoing global economic lowdown i aecing low-income group dipropor-ionaely. Ti developmen come aer a long expanionary pae were income ine-qualiy wa already on e rie in e majoriy o counrie.

Te recen period o economic expanion wa accompanied by ubanial employ-

men grow acro mo region. Beween e early and world employ-men grew by around per cen. However ere wa coniderable variaion in labourmarke perormance beween counrie. In addiion no all individual ared equallyin e employmen gain. In a number o region women coninued o repreen adiproporionae are o non-employed peron reacing nearly per cen in eMiddle Ea Nor Arica and Aia and e Pacic.

Employmen grow a alo occurred alongide a rediribuion o income away romlabour. In ou o counrie or wic daa are available e are o wage in oalincome declined over e pa wo decade. Te large decline in e are o wagein GDP ook place in Lain America and e Caribbean (- poin) ollowed by Aia

and e Pacic (- poin) and e Advanced Economie (- poin). Beween and approximaely wo ird o e counrie experienced an

increae in income inequaliy (a meaured by cange in e Gini index). In oer worde income o ricer oueold ave increaed relaive o oe o poorer oueold.Likewie during e ame period e income gap beween e op and boom percen o wage earner increaed in per cen o e counrie or wic daa are available.

Te gap in income inequaliy i alo widening a an increaing pace beween erm execuive and e average employee. For example in e Unied Sae in e cie execuive of cer (CEO) o e large companie earned ime morean e average worker. Ti i up rom ime more in . Even in Hong Kong

(Cina) and Sou Arica were execuive are paid muc le an eir Unied Saecounerpar CEO pay ill repreen and ime repecively e wage oe average worker.

rends in employmentand inequality

. rend in employmen and inequaliy


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Te propec are or a coninuaion o a rie in income inequaliy in e coure o epreen economic lowdown and e recen developmen uc a e nancial criiand e arp rie in ood price. A i repor ow e laer a already dipro-

porionaely aeced poorer oueold.

Riing income inequaliy can be a good ing o e exen a i i crucial o rewardwork eor alen and innovaion key engine o economic grow and weal crea-

ion. However ere are inance were income inequaliy reace exceive level ina i repreen a danger o ocial abiliy wile alo going again economic ef ciencyconideraion. Indeed iger income inequaliy i aociaed wi iger crime rae andlower lie expecancy. Higer inequaliy may alo deepen macroeconomic inabiliy ine ene a low-income oueold may adju more lowly o economic ock. Inaddiion ere are inance were ricer group may ecure economically-inef cienadvanage uc a diorive axe or an allocaion o public und a goe again eeconomic inere o e counry a a wole. More undamenally wen income ine-qualiie are perceived o reac exceive level ocial uppor or pro-grow policiemay be rongly eroded. Already now ere are widepread percepion in many coun-rie a globalizaion doe no work o e advanage o e majoriy o e populaion.

Te policy callenge i ereore o enure adequae incenive o work learn andinve wile alo avoiding ocially-armul and economically-inef cien income ine-qualiie. Laer caper o i repor examine i iue in deail.

Introduction

Since e world o work a been i by a number o global developmen in paric-ular nancial urmoil riing ood price and a orage o raw maerial. Ti a broug

an end o e rapid grow and rong employmen perormance exibied by e worldeconomy almo uninerrupedly ince e mid-.Looking orward a criical iue i e exen o wic e curren nancial crii and

lowdown in e world economy may aec diproporionaely low-income group. Ti iall e more relevan given a a i caper will ow during e ig-grow periodincome inequaliy increaed in e majoriy o counrie wic may in urn damage eocial abric.

Te purpoe o i caper i o dicu rend in employmen and income inequaliyover e pa wo decade and o ae wy riing income inequaliy ould be a maero policy concern.

A number o e underlying acor beind riing income inequaliie will be analyed in

deail in laer caper. Caper examine e role o nancial globalizaion wile Caper oer a compreenive quaniaive analyi o e role o domeic acor noably ri-parie iniuion in aping income inequaliie aking due accoun o rade and oerdimenion o globalizaion. Caper conider rend in job qualiy and e exen o wicee rend may ave conribued o riing income inequaliy. Caper examine rediribu-ive policie roug axe and ocial raner. Laly Caper conider Decen Work aa policy package o addre exceive income inequaliie and uppor employmen grow.

Secion A o i caper provide an overview o developmen in e world o workepecially a regard employmen grow and labour are o income over e pa wo dec-ade. Secion B review recen regional and counry developmen wi repec o income ine-qualiy. Ti include a pecial ocu on e compenaion o execuive in eleced counrie.

Te exen o wic income inequaliy i an iue o concern or policy-maker will be dicuedin Secion C. Laly Secion D inroduce ome o e poenial acor underlining e rendincreae in income inequaliy and e up a more deailed dicuion in e caper a ollow.


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1. Trends in employment and inequality

A. Overview of recent developments and employment trends

The world of work is being affected by the economic slowdown

Rapidly riing oil ood and raw maerial price a well a e global nancial urmoil aveaeced e world economy over e pa year.1 In e lig o ee developmen eInernaional Moneary Fund (IMF) a revied global economic grow oreca down-

ward epecially or a number o e Advanced Economie e Unied Sae EuropeanUnion (EU) and Japan.2 Grow urned negaive in a number o counrie includingFrance Germany Japan and Ialy in e econd quarer o wi grow in emergingand developing economie expeced o low down aloug o wa degree will parlydepend on ow evere e iuaion in e Advanced Economie urn ou o be.3

Te curren economic lowdown a already ad an immediae impac bringing oa al e rong employmen grow enjoyed wi lile or no inerrupion by moAdvanced Economie ince e early . Te Unied Sae or example experiencednegaive employmen grow in eac o e r eig mon o . Moreover employ-men grow in mo counrie o e Organiaion or Economic Co-operaion andDevelopmen (OECD) i expeced o low down over e remainder o and inoearly (OECD a; OECD b).

Global employmen grow aloug ill poiive i alo expeced o low down in a employmen gain dimini in developing economie. A a reul unemploymeni expeced o rie o . per cen in (ILO a).

In e conex o e curren nancial crii i i alo quie likely a e impac oee mo recen developmen a ye o be ully el. In i repec i will be imporano monior e exen o wic low-income group may be aeced epecially in e devel-oping world were e recen eep increae in ood price a diproporionaely reducede purcaing power o poorer oueold (ee Secion B).

Tee developmen will likely ineniy ome o e cange a ave caracerized

e world o work over e pa wo decade or o. Fir a e Advanced Economie areo oal employmen a been in eady decline over e pa decade alling o ju over per cen in a o e developing economie a coninued o rie (g. . panel A).In ac e world o work i evolving in uc a manner a e region o Aia and ePacic and Lain America and e Caribbean now accoun or nearly wo ird o worldemploymen e ormer alone accouning or more an al. Te wo region ave aloenjoyed imilar employmen grow ince (g. . panel B).

Second even oug e mo recen period o economic expanion rom e early on a been accompanied by relaively robu employmen grow i overallrend mak a number o imporan diribuional acor: (i) employmen grow a

varied coniderably wiin eac region and large number o women remain excluded

rom e world o work; (ii) labour are o income a been declining; and (iii) in emajoriy o cae i period o expanion wen and in and wi wider income inequali-ie e eme o i year World o Work Repor.

. In December e ood price index iued by e Food and Agriculure Organizaion o e UniedNaion (FAO) ood a e ige monly average ince i incepion in . On July e

price o a barrel o oil reaced i ige ever price a over US$ .. See Appendix A or a li o counry grouping.. Te recen lowdown in e Unied Sae and oer developed naion a no ye become global wic

ugge a ere may be ome decoupling o grow in developing counrie rom grow in e AdvancedEconomie. However ere i ome coniderable debae a o e realiy o i uppoiion epecially wenexamined over e longer erm (ee or example Koe Orok and Praad ).


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The slowdown follows a long period of rapid employment growth

Beween e early and almo all region o e world enjoyed relaively robuemploymen grow (g. . panel A). In paricular ince e Middle Ea Sub-Saaran and Nor Arica and Lain America and e Caribbean ave experienced annualgrow o nearly . per cen and oen more wic over e year amoun o arounda per cen oal increae in employmen. Job gain in e Advanced Economie avebeen eady i unpecacular a per cen per annum bu ey ave been oupaced by eAia and e Pacic region by a acor o wo ince . A e oer end o e pec-rum Cenral and Eaern Europe and e Former Sovie Republic aw a deerioraion in

e employmen iuaion a accompanied a erie o marke reorm beginning in aloug a rend began o be revered around (ILO ).Srong regional improvemen in employmen oucome owever ell only par o

e ory. Te realiy i a ignican variaion in employmen grow ave occurredwiin all region ince e early a own by Figure . panel B. Moreover ecoef cien o variaion reveal a e diperion in counry grow rae wa ige inregion wi ronger employmen grow (e Middle Ea and Sub-Saaran Arica) andlowe were grow wa more moderae (e Advanced Economie).4

Te employmen conribuion o women o e world o work ince e early a varied coniderably rom region o region. In e Advanced Economie or example

women ave accouned or e bulk o employmen grow (over per cen: ee g. .

panel A) bu elewere or le an a ird. Tere ave been coniderable improvemenin recen year in emale labour marke oucome wi many women progreing romprecariou job o wage and alaried employmen. However ee rend ave no made aubanial dierence o e gender gap in e workplace (ILO b). Te employmenrae o women a . per cen coninue o rail oe o eir male counerpar by ome percenage poin (ILO a).

No urpriingly i a inuenced e exen o wic lower emale employmenrae drag down overall employmen rae. For example in e Middle Ea Nor Aricaand Aia and e Pacic women coniue per cen or more o e non-employed(g. . panel B).5 Even in e Advanced Economie and Cenral and Eaern Europe and

. Te coef cien o variaion i meaured a e andard deviaion divided by e mean.. Non-employed i dened a e um o e dierence by counry and gender beween e maximumand e prevailing employmen rae among peron aged and over in e region.

Figure 1.1. World employment trends

Source: Estimates by International Institute for Labour Studies (IILS); ILO, 2008a.

Panel A. Share of Advanced Economies in world employment, 1991-2007 Panel B. Share of employment growth by region, 200 0-20 07

AdvancedEconomies

Sub-SaharanAfrica

Asia & the Pacific

Central & EasternEurope and Former

Soviet Republics

Latin America &the Caribbean

MiddleEast North

Africa

14.0

14.5

15.0

15.5

16.0

16.5

17.0

17.5

1991 1993 1995 1997 1999 2001 2003 2005 2007


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Former Sovie Republic were women coniue a izeable proporion o employmeney noneele alo accoun or nearly wo ird o e non-employed. Te developmen

poenial o many o ee counrie i u conrained by e limied opporuniie orwomen o bene rom and ake par in e world o work (ILO b). I ould benoed in a conex a e naure o employmen a alo canged dramaically. Teevoluion o non-andard work arrangemen in wic women paricipae o a dipropor-ionae degree i dicued in Caper .

Source: IILS estimates; ILO, 2008a.

Source: IILS estimates; ILO, 2008a.

Figure 1.2. Employment growth and dispersion

Figure 1.3. Trends in female employment growth

Panel A. Evolution of employment, 1991-2007 (1991 = 100) Panel B. Cross-country dispersion of employment growth, 1991-2007Average annual employment growth, per cent

1991 1993 1995 1997 1999 2001 2003 2005 2007

Advanced Economies

Asia & the Pacific Central & Eastern Europeand Former Soviet Republics

Sub-Saharan Africa

Latin America & the Caribbean

Middle East

North Africa

80

90

100

110

120

130

140

150

160

170

-4

-2

0

2

4

6

8

Best performer

Region average

Worst performer

Panel A. Contribution of women to employment growth,1991-2007 (percentage)

Panel B. Percentage of women among the non-employed,2007 (percentage)

30

40

50

60

70

80

90

100

20

25

30

35

40

45

50

55

60

65

AdvancedEconomies

AdvancedEconomies

Asia& thePacific

Asia& thePacific

Central &EasternEurope

and FormerSoviet Republics

Central &EasternEurope

and FormerSoviet Republics

Sub-SaharanAfrica

Sub-SaharanAfrica

LatinAmerica

& theCaribbean

LatinAmerica

& theCaribbean

MiddleEast

MiddleEast

NorthAfrica

NorthAfrica


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Wage shares declined significantly over the expansionary period

Te pa ew decade ave wineed a ignican cange in e capial-labour incomediribuion (ee Gollin ; Krueger ). An analyi o e daa colleced oradvanced economie newly indurialized and developing naion alike reveal a e

wage (or labour) are o oal income a declined in nearly ree quarer o e counrieconidered. Te decline occurred in mo region (g. .).6 Te ae decreae occurredin Lain America (over percenage poin) and over a raer or period o bu ignican decline were alo ound in e Advanced Economie and Aia

were wage are ell over percenage poin during e period - and - repecively. Excepion o i downward rend are Cenral and Eaern Europee Ruian Federaion e Middle Ea and Nor Arica were e labour are aucuaed bu remained conan over e period -.

Inereingly e paern o e decline a been imilar in mo counrie: wageare ave declined eadily over e pa ree decade excep in e lae /early and again in e lae . Secondly e drop in wage are wa paricularly ain e early and e early .

Muc o e lieraure o dae conrm e reul preened ere namely a labourare o income a been declining eadily over e pa ew decade. Several udie averied o examine e acor a may ave conribued o i wi a paricular empaion e eec o globalizaion including rade and ecnological cange bu no paric-ular conenu a emerged.7 For example Harrigan and Baladan () ound a kill-biaed ecnological cange ad a greaer eec on wage are an e inenicaion

. Aloug e daa on wage are are widely available or OECD counrie coniderable eor were madeo collec daa or addiional counrie in order o obain a broader view: ee Appendix B or a more deaileddecripion o e daa ource and calculaion. I ould be noed a a correcion or e el-employed wano poible or all counrie involved. Wage are are ereore preened a an index in order o indicae

a e analyi ocue on cange raer an level.. See ecion C o i caper or a dicuion o e relaionip beween ome o ee developmen andincome inequaliy.

Figure 1.4. Development of wage shares, by region, 1985-2006(Wage share in 2000 = 100)

Source: IILS estimates (see Appendix B for methods, calculations and data sources).

1980 1982 1984 1986 1988 1990 1992 1994 1996 1998 2000 2002 2004 2006

Advanced Economies

Central & Eastern Europe and Former Soviet Republics

Asia

1989 1991 1993 1995 1997 1999 2001 2003

North Africa

Sub-Saharan Africa

Latin America and the Caribbean

Middle East

85

90

95

100

105

110

115

85

90

95

100

105

110

115


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o rade did. In e view o Gucina () meanwile e decline wa due o openneand ecnological progre wile Jaumoe and yell () eld a globalizaion waonly one o everal acor and a oer including labour marke reorm ad alo con-ribued. Noe a ee udie do no e or e eec o e developmen o nancialmarke on wage are (ee Caper ).

A more deailed way o examining e diribuion o income beween labour andcapial i o compare e annual grow rae o real wage and produciviy. Figure .compare e grow rae o remuneraion wi oupu per employee. I e annualgrow rae o real wage i lower an a o produciviy e wage are o incomedecline.

An analyi o counrie or wic daa are available (Brazil Cina India eOECD counrie e Ruian Federaion and Sou Arica) indicae a or eperiod - e nding are broadly conien wi e above; in ou o counrie produciviy grow exceeded wage grow (g. .).8 In oer wordlabour are o income ell.9

A cloer examinaion o non-OECD counrie reveal ome inereing i mixedreul.

. Given a e ime rame preened vary rom counry o counry direc cro-counry comparion overime canno be made.

. Over e period - e Nordic counrie e Unied Kingdom and e Cenral and EaernEuropean economie (all OECD counrie) ad rong real wage and produciviy grow leading o anincreae in e wage are or e period.

Figure 1.5. Average annual wage and productivity growth, per cent, 1990-2006

Note: Countries are sorted in ascendingorder (top to bottom) according to wage

growth. Data for 1990 refer to 1995 in thecase of Brazil, the Russian Federation and1996 in the case of the Czech Republic,Greece, Hungary, Ireland, Mexico, Poland,Portugal, Slovak Republic and Sweden.Data for 2006 refer to 2004 in the case ofBrazil, China, India, and South Africa and to2005 in the case of the Russian Federation.

Source: IILS estimates (see Appendix B formethods, calculations and data sources).China

South Africa

Russian Federation

Greece

Czech Republic

Korea

Hungary

Poland

Sweden

United Kingdom

IrelandNorway

Slovak Republic

Portugal

Finland

Denmark

Luxembourg

Australia

Mexico

Belgium

United StatesFrance

Canada

IndiaNetherlands

New Zealand

Austria

Spain

Germany

Italy

Japan

Brazil

-4 -2 0 2 6 84 10 12

Productivity growth

Wage growth


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Cina perormance wa among e be in erm o wage and produciviy growor bo period. Moreover e rae o improvemen compared wi oer counrieincreaed;

Sou Arica alo experienced a growing wage are and a rong real wage and pro-duciviy grow rae aloug o a leer exen an Cina;

Produciviy grow in bo Brazil and India conienly oupaced wage grow wie ormer experiencing negaive wage grow over e period -.

Te overall rend over e and early i a real wage increaed le anproduciviy generaing a reducion o e wage are in e va majoriy o counrieconidered. Any increae in e wage are a occurred in ome OECD counrie in eearly did no make up or e decline a ook place in e . In um e wodieren way o compuing cange in e wage are ulimaely yield imilar reul: e

wage are declined in nearly ree quarer o e counrie conidered.

B. Trends in income inequality

Te debae regarding e impac o globalizaion and i numerou manieaion iwidely documened (ee or example Lee ; IMF ). Broadly peaking deeperinernaional economic inegraion can raie income level or all paricipaing coun-rie albei aer a poenially dif cul raniion pae. On e oer and i i argueda wile overall income level improve e bene o globalizaion are no aredequally.

Tere ave been ree baic approace o e aemen o ow global income di-ribuion a evolved in e lae era o globalizaion (World Bank ) involving a

conideraion o:10(i) Wiin-counry inequaliy i approac ake ino accoun e income diribu-ion wiin counrie uing meaure uc a e Gini index o illurae e enireincome diribuion o a counry. Recen udie including i repor nd a

wiin-counry inequaliie ave increaed over e pa wo decade or o;

(ii) Inernaional inequaliy meaure dierence in average income acro counrie.Tere are no reerence made o income diribuion wiin eac counry a i iaumed a people ave e mean income o eir counrie. According o omerecen udie inernaional income inequaliy a ended o decline. Ti largelyreec e rend increae in per capia income in emerging economie like Cinaand India;

(iii) Global inequaliy an approac a ake ino accoun bo wiin- and beween-counry income inequaliie.11 According o i approac income dierence amongall individual in e world are conidered irrepecive o e counry o reidence oe individual.12

. See alo or example Capau and Decoer and Milanovic a and b or a dicuion orend in world income inequaliie.. Houeold budge urvey are ued o meaure income are o calculae a precie image o wiincounry inequaliy. Ten eac income are i weiged by e GDP per capia o e counry conidered inorder o calculae e mean income or eac income cla.

. Over e pa ew decade concluion regarding global income diribuion ave varied according oe approac aken wi no clear conenu emerging on rend or magniude (ee Anand and Segal ;

World Bank ; and Caper o i repor).


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A diincion alo need o be made beween income inequaliy and weal inequaliy.Income reer o ow wile weal reer o ock. A weal depend on e accumu-laion o income ow i i ereore deermined by aving beaviour level o incomeuc a labour income and nancial income (ariing rom inere reurn capial gainand dividend) axe and ineriance.13 In i caper only e wiin-counry incomeinequaliy approac will be conidered.14 Meauremen iue are dicued in box ..

Rising income inequality since the early 1990s

Te period - oer e mo compreenive napo o income inequaliy andpaern over ime by region and counry. Over i period more an wo ird o e counrie or wic daa are available experienced an increae in income inequaliya meaured by cange in e Gini index (g. .). Te ew reducion were principallyconcenraed in Sub-Saaran Arica and e Middle Ea. However wiin ee regionepecially e ormer e level o inequaliy remain ig.

Oer noable developmen in income inequaliy by region include:

Advanced Economie: only Denmark France Germany and Swizerland recordeddecline in income inequaliy wile e large increae occurred in Belgium Fin-land and Sweden. Generally level o income inequaliy remained low compared ooer region aloug in e Republic o Korea e Unied Kingdom and e UniedSae wic ave e ige level in e region ey are almo a ig a e igelevel in oer region;

Aia and e Pacic: mode decline in e Gini index occurred only in Cambodiaand e Pilippine were income inequaliy remain noneele among e igein e region. Cina and Lao recorded ubanial increae over e period -;

Cenral and Eaern Europe and Former Sovie Republic: ere were noiceableincreae in income inequaliy everywere excep e Ruian Federaion Kazakanand Slovenia were reducion were recorded aloug e ormer coninue o aveone o e ige level wiin e region;

Lain America and e Caribbean: mixure o counrie wi riing and alling incomeinequaliy wi Bolivia and Colombia recording e large increae and Guyana elarge decline. Guyana now a e lowe level o income inequaliy in e region andPanama e ige;

Middle Ea and Nor Arica: among e ew counrie or wic daa were availableere were only moderae cange (in eier direcion) a income inequaliy remained

cloe o level preen in e early . Only Yemen and o ome exen Jordan expe-rienced noewory reducion in income inequaliy wi e ormer poing one oe mo ignican decline ound in any o e region;

Sub-Saaran Arica: nearly wo ird o e counrie or wic daa are available awreducion in income inequaliy bu level remain among e ige worldwide.

. Wile e wo are igly correlaed ypically e diribuion o weal wiin counrie i moreunequal an e diribuion o income i i ae inequaliy a a e more proound and more direcconequence or economic grow. Social oucome owever are more direcly aeced by income inequaliy

o public policie uually ocu on income raer an on weal (ee ecion C o i caper).. Weal inequaliy e reuling nancial marke problem and e conequence or economic grow

will be dicued in Caper .


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Box 1.1. Measurements of income inequality

There are different measures of income inequality. All seek to assess the distribution of incomeamong individuals (or households), and thus the level of inequality in a given society, but eachhas its strengths and limitations. The appropriateness of a given measurement can be assessedagainst a number of criteria (see Litchfield, 1999; Cowell, 1999 and 2006). These criteria include:

The Transfer Principle:the measurement in question should fall (rise) with the redistribution of

income from (to) a richer to (from) a poorer person, or at least should remain unchanged; Income Scale Independence:when all incomes change proportionally (for example, if each

persons income doubles), there is no change in the measurement of inequality;

Population Principle:merging two distributions will not alter the measure of inequality;

Anonymity or Symmetry:only individual incomes are taken into account in the constructionof the measure;

Decomposability:the overall measure and changes are consistent with changes at every level,so that increases in inequality within population subgroups will result in overall increases ininequality.

Two inequality measures are considered in this report.

Gini index

First, the Gini index varies between 0 (complete equality) and 100 (complete inequality). Itmeasures the extent to which the distribution of income (or consumption expenditure) amongindividuals or households deviates from a perfectly equal distribution.The Gini index, like other measures of inequality, suffers from a number of drawbacks. First, itdoes not identify where in the income distribution the rise (or fall) in income inequality may haveoccurred and marginal changes over time may be difficult to quantify. Moreover, it cannot beused if values are negative (for example, negative net wealth). And while there are ways of decom-posing the Gini index, the component terms of total inequality are not always intuitively or math-ematically appealing (see, for example, Fei, Rainis and Kuo, 1978; Yitzhaki and Lerman, 1991).

P9/P1

Second, the P9/P1 ratio measures the ratio of the income of a person in the 90th percentile tothat of a person in the tenth percentile. The measure is common, especially in developed coun-

tries, for a number of reasons. First, such ratios are fairly straightforward and easy to interpret,for example, a ratio of 5 means that the income of the poorest person in the top 10 per cent ofincome distribution is five times that of the richest person in the bottom 10 per cent. Second, itis easy to calculate, and in developed countries, there is often a longer time-series of data thatmakes it possible to examine changes in income inequality over time. There are, however, atleast two disadvantages to using the P9/P1: first, they do not reflect what happens in other partsof the income distribution and, secondly, sufficient data on developing nations are not availablefor comparison purposes.

In this report, income inequality is calculated principally using the Gini index for consistencyand, given that it is a widely accepted measure of inequality, meeting the requirements of atleast the first four criteria above. Moreover, data are readily available for a wide range of coun-tries over time. The P9/P1 ratio is also used for some specific purposes, like the analysis ofwage differentials.

Source: World Bank (1999).

During e period o admiedly a orer period and ewer counrie aligly dieren ory emerge a r glance a income inequaliy ell in more an al oe counrie or wic daa are available and ubanially in ome including El Sal-

vador e Ilamic Republic o Iran Liuania Mexico Sweden and Uzbekian. On eoer and income inequaliy ill roe in ome counrie e increae being raer

ubanial in Armenia Cina Lavia Romania and urkey.A more compreenive analyi over e ull period (-) reveal a incomeinequaliy roe in more an wo ird o e counrie or wic daa are available. In


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Note: The data presented may refer to a year close to the reference year, e.g. 1991 instead of 1990.

Source: IILS estimates (see Chapter 3).

Figure 1.6. Gini index by region for 1990 and 2000

Un

ite

dStates

Korea,

Repu

blico

f

Un

ite

dKing

dom

Israe

l

Spa

in

Ne

therlan

ds

Japan

Aus

tra

lia

Cana

da

Swe

den

Norway

Be

lgium

Finlan

d

Luxem

bourg

Aus

tria

Germany

Sw

itzerlan

d

France

Denmark

Ita

ly

0

10

20

30

40

50

60

Advanced Economies

20001990s

ReducedInequality

20001990s

ReducedInequality

0

10

20

30

40

50

60

20001990s

ReducedInequality

Asia & the Pacific

Singapore

Tha

ilan

d

China

VietNam

India

Lao

Peop

les

Dem.

Rep.

Philipp

ines

Cam

bo

dia

0

10

20

30

40

50

60

20001990s

ReducedInequality

Central & Eastern Europe and Former Soviet Republics Latin America & the Caribbean

Sub-Saharan AfricaMiddle East and North Africa

0

15

30

45

60

75

Azerba

ijan

Georg

ia

Uz

be

kistan

Repu

blico

fMo

ldova

Kyrgyzs

tan

Turkmen

istan

Es

ton

ia

Ukra

ine

Armen

ia

Lithuan

ia

The

former

Yugos

lav

Rep.

ofMace

don

ia

Po

lan

d

Bu

lgaria

La

tvia

Roman

ia

Hungary

Be

larus

Czec

hRepu

blic

Russ

ian

Fe

dera

tion

Kaza

khs

tan

Sloven

ia

0

10

20

30

40

50

60

70

80

90

Panama

Bo

liv

ia

Co

lom

bia

Chile

Peru

Argen

tina

Cos

taRica

Uruguay

Venezue

la,

Bo

l.Rep.

of

Braz

il

Jama

ica

Nicaragua

Mex

ico

Guyana

0

10

20

30

40

50

60

70

80

90

20001990s

20001990s

Leso

tho

Ugan

da

Gam

bia

Cted'Ivo

ire

Burun

di

Zam

bia

Sou

thAfrica

Burk

ina

Faso

Kenya

Ma

dagascar

Senega

l

Ma

li

Mauri

tan

ia

Mauri

tius

Ghana

Iran,

Islam

ic

Repu

blico

f

Morocco

Turkey

Tun

isia

Jordan

Yemen

ReducedInequality

ReducedInequality


28/179

12


approximaely al oe counrie income inequaliy increaed in bo and (g. .). In approximaely anoer one ird any decline a occurred in e morecen period albei over a orer ime wa no enoug o oe e increae aoccurred over e . Only in a ew counrie (ewer an one ird o e oal)

including or example Brazil Burkina Fao and Mexico were overall improvemen oincome inequaliy recorded.

Increasing wage gap between high- and low-wage earners

Te wage gap beween e ige per cen and lowe per cen earner a aloended o increae. An examinaion o exiing daa or OECD counrie and microdaaor Brazil Cina and India reveal a inequaliy a rien in o e counrieince e early or wic daa are available.15 Te ige wage diperion occurred

in Brazil Cina India and e Unied Sae and e lowe in Belgium and e Nordiccounrie (g. .).16Over e pa wo decade large increae ave occurred in Hungary Poland Porugal

and e Unied Sae were e raio i now near or above bu alo inereingly in devel-oping counrie and in counrie a ave low inequaliie overall uc a e Nordic coun-rie. Suc a developmen in ee counrie were low inequaliy i een a a major elemeno ocial coeion provide an illuraion o e rend oward increaing inequaliie.

Wile ome counrie experienced overall decline only in Belgium France Spainand Swizerland did e raio all more or le conienly over ime. I i imporan onoe owever a mo decreae ook place or counrie wi or ime-erie daa

. See Appendix B or meod and calculaion.. See Secion B o i Caper or evidence regarding e raio o execuive pay o average wage in anumber o counrie.

Panel A. Countries with increases in 2000 and 200 5

OverallImprovement

Panel B. Countries with declines in 2000 -20 05

10

20

30

40

50

20001990s 2005

China

Cos

taRica

Un

ite

dStates

Venezue

la,

Bo

l.Rep.

of

Uruguay

Turkey

Armen

ia

The

former

Yugos

lav

Rep.

ofMace

don

ia

La

tvia

Po

lan

d

Roman

ia

Kaza

khs

tan

Bu

lgaria

Germany

Hungary

Czec

hRepu

blic

20001990s 2005

10

20

30

40

50

60

70

Braz

il

Chile

Argen

tina

Repu

blico

fMo

ldova

Kyrgyzs

tan

Uz

be

kistan

Es

ton

ia

Aus

tra

lia

Lithuan

ia

Finlan

d

Swe

den

Be

larus

Mex

ico

Gam

bia

Burk

ina

Faso

Iran,

Islam

icRep.

of

Sloven

ia

Figure 1.7. Changes in Gini index between 1990 and 2005

Notes: The data presented may refer to a year close to the reference year, e.g. 2001instead of 2000, and 2005 may refer to the most recent year available, for example, 2004.

Source: IILS estimates (see Chapter 3).


29/179

13


Note: Data for Brazil (1992, 1999 and 2004), China (2001 and 2005) and India (1990 and1999) refer to specific years only, not a full time series and refer to salaried employment.

Source: IILS estimates.

Figure 1.8 Ratio of earnings of top 10 per cent earners vis--visbottom 10 per cent earners, 1990-2006

2.0

1990 1992 1994 1996 1998 2002 2004 2006

3.0

4.0

5.0

6.0

2.0

1990 1992 1994 1998 2000 2002 2004 2006

3.0

4.0

5.0

6.0

1.0

1990 1992 1994 1996 1998 2002 2004 2006

2.0

3.0

4.0

5.0

2.0

1990 1992 1994 1998 2000 2002 2004 2006

2.5

3.0

4.0

3.5

4.5

1.0

1990 1992 1994 1996 1998 2000 2002 2004 2006

2.0

3.0

4.0

5.0

0.0

1990 1992 1994 1996 1998 2000 2002 2004 2006

2.0

4.0

6.0

8.0

10.0

12.0

Republic of Korea

United States

Germany

Switzerland

Belgium

Spain

Finland

France

Brazil

China

India

United Kingdom

Canada

Ireland

Japan

Australia

New Zealand

Portugal

Netherlands

Sweden

PolandCzech Republic

Austria

Norway

Hungary

Italy

Denmark


30/179

14


uc a Belgium Spain and Swizerland or wi erie break uc a Canada and Fin-land.17 In ac Canada Finland Ireland and e Republic o Korea ave een ignicanincreae in e raio ince e mid- o lae-.

More generally e lae are caracerized by a marked increae in e wage gapbeween e op and boom wage earner. Te ecion on execuive pay (ee below) eemo ugge a e income o e op earning decile grew muc aer an a o emedium or boom earning decile.

A comparion o cange over e and (uing e Gini index) andwage gap (uing e P/P raio) can provide valuable inormaion on e coniencyo wiin-counry income inequaliy meaure. In paricular e P/P raio may elpexplain cange in e Gini index ince e ormer provide inormaion regarding egap beween e exreme wo decile and e laer a ummary o overall inequaliy.

Suc a comparion ow a cange in e Gini index and P/P raio are con-ien in mo counrie: movemen in e P/P (gap beween e upper and lower

wage earner) correpond wi movemen in e Gini index (overall income inequaliy).O coure i doe no mean a e P/P raio explain e dynamic o cange in eGini bu ere i ome coerence beween e movemen (in e ame direcion) o bomeaure. For example: in France and Swizerland ere wa a drop in bo e Gini ande P/P raio in e ; e large increae in e Gini and e P/P raio in Fin-land and Sweden during e were alo conien wi eac oer. Te mall increaein inequaliy in e Republic o Korea e Unied Kingdom and e Unied Sae in e wa in line wi e mall increae in e P/P raio over a period. Te ameapplie o e newly indurialized economie; large increae in overall income inequaliyin Cina in e early and in India in e are conien wi an increaing gapbeween e upper and lower wage diribuion; and in Brazil e mall drop in e Giniindex wa accompanied by a reducion in e P/P raio during e and .

Rising income inequality between executives and average employees

Te rie in execuive pay wic i omeime regarded a a driver o income inequaliy aaraced coniderable aenion over e pa ew year bu epecially o in e conex oe recen nancial crii.18,19

Ti i an iue wic need o be reaed in a dipaionae manner avoiding inormedpercepion. Indeed e job o execuive e op manager o rm a become moredif cul owing o e ac a e marke condiion under wic rm operae avebecome more volaile. Enerprie are under increaing preure o eize e opporuniieo globalizaion and new ecnology. Te gain rom eizing oe opporuniie can be

large indeed. Te loe rom ailing o adap can alo be ignican owever wile enew ecnology and new orm o work organizaion being inroduced by rm make eak o manager more complex. Tee rend explain wy rm are increaingly ocuingon perormance in deermining execuive pay.

Cro-counry udie in i area are owever dif cul or a number o reaonincluding variaion in accouning and dicloure pracice. Moreover comparion

. In Finland e P/P decreaed over e period - becaue o a erie break beween and. Over e period - i increaed rom . o .. In Canada a break came in and eindex dropped rom o .. Canada alo experienced an increae in P/P over e lae and early.. Trougou i ecion e erm execuive reer o bo CEO and lower-level execuive.

. Sield () provide an inereing analyi in i repec. He ow ow companie af liaed o eBuine Council o Auralia conanly criicize e lack o compeiivene o e Auralian workorce

wile a e ame ime eir own execuive pay i on e rie.


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15


roug ime are ampered by meodological cange in e way execuive pay i calcu-laed and/or dicloed (box .). Wi ee cavea in mind e purpoe o i ecioni o examine e paern o execuive pay in ome o e counrie or wic uc daaare available namely Auralia Germany Hong Kong (Cina) e Neerland SouArica and e Unied Sae.20

What is executive pay and how is it measured?

Execuive pay include variou componen. Fir ere i a xed componen wic maybe regarded a e bai o e compenaion package and include alary and cerain ben-e and allowance in kind including e privae ue o company car aircra nancialcounelling and ome ecuriy.21

Second ere i oen a variable componen a i eier accorded on a dicreionarybai or baed on previouly dened perormance crieria.22 Tee are baed on individualbuine uni or corporae perormance and may include reold or ceiling limiinge amoun o paymen involved (Lync and Perry ).23 Long-erm variable compen-aion i ypically baed on cerain perormance crieria eablied in advance and oenlinked o a company ock in order o creae incenive or greaer areolder value.Tee can include a combinaion o ock rericed ock ock opion and ock appre-ciaion rig.24

Tird companie oen ave a penion programme in place eier pecically deignedor execuive or open o a wider range o employee. In e Unied Sae a cerain par oe compenaion i oen deerred unil e execuive reace reiremen age.

Finally many companie provide erminaion bene or execuive eier a a lumpum or in e orm o coninued paymen o compenaion aer e expiry o a conrac.Te erminaion claue may preclude paymen i e erminaion o e conrac i cauedby e execuive in e even o unilaeral erminaion o conrac or example or a e

reul o a eriou aul o e execuive.Reecing on ee meodological iue (box .) i i dif cul o compare execu-ive pay acro counrie. o remedy i i would be ueul o develop a uniorm way ocalculaing e value o e dieren componen o are-baed compenaion. Ti ow-ever goe beyond e cope o i repor. Raer e purpoe ere i o provide a nap-o o execuive compenaion and ow i a evolved over ime and in comparion wie average wage.

. See Eber Papadaki and orre () or a more deailed analyi o execuive pay.. Cerain companie alo provide reimburemen or ax liabiliie . Te deerminaion o xedcompenaion i uually baed on compeiive bencmarking involving a general alary urvey and deailedanalyi o pecic indurie or marke peer. See Murpy () or criicim and urer commen.. Te erm bonu i mileading in i repec a demonraed by e dicloure pracice in e UniedSae. Prior o bonu reerred o paymen or predeermined arge bu i now mean dicreionary

paymen by e board.. Criicim in ome counrie or inance in e Unied Kingdom a ocued on e ac a bonuarge requenly remain unpublied. Furer Bruce e al. () draw aenion o an increaingly complexrucure o bonu arge a i linked o iger bonu pay bu no o iger areolder reurn.. Sock reer o a pecic number o are e value o wic rie wi e value o e ock; rericedock reer o are diribued o execuive on e bai o perormance or enioriy; ock opion o e

rig o purcae a cerain number o are a a predeermined price (e exercie price) or a peciedperiod o ime; and ock appreciaion rig reer o e rig o receive paymen in ca deermined in linewi e appreciaion o e ock price.


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16


Executive pay, excluding share-based compensation, exceedsaverage wages by a factor of at least 50 and, in some cases, 180

An examinaion o execuive pay in or e large companie in ix elecedcounrie ow a cie execuive of cer (CEO) earn on average beween and ime more an e average employee (able .).25 Te ige-paid CEO are in eUnied Sae were average pay exceed US$ million per year or abou ime

. Available a: p://www.orbe.com////world-large-companie-biz-global-cx _d_global_land.ml.

Box 1.2. Measurement of executive pay: methodological issues

Disclosure practices

Disclosure practices differ widely across countries. While some countries, including France, theNetherlands, the United Kingdom and the United States require companies to report detailedcompensation data in a remuneration report, others like Greece, have no specific requirements.In some cases, such as France, Germany and the Netherlands, disclosure practices were ini-

tially governed by codes of best practice but were transformed into legal provisions, since thecompliance by firms was considered unsatisfactory (European Corporate Governance Institute,2003 and Rang, 2008).

In addition, many regulatory provisions are vague, so companies in such countries as Brazil, Ger-many, Japan and Mexico frequently report only aggregate data on executive compensation. Evenin Germany, where companies have been required to provide detailed individual data on execu-tive compensation since 2006, this requirement can be overturned by two thirds of share-holders. In some countries, executives seem to consider the disclosure of the precise amount ofremuneration to be a risk to their personal safety (Leal and Carvalhal da Silva, 2005).

Stock options and share-based compensation

One of the principal difficulties associated with measuring executive compensation is to quantifythe actual or prospective value of share-based compensation. Even in countries where disclo-

sure of stock options is prescribed by national regulation, a specific methodology for calculatingthis value is seldom laid down. As a result, in France, South Africa and the United Kingdom,companies often disclose the number of the shares or options granted but without putting avalue on them. Even where a value has been calculated, the methodology can vary. For example,companies in many countries calculate the value of share-based compensation at the time thatit was granted, whereas in others they calculate the value of stock awards and options that haveactually been exercised.

The situation is further complicated by the fact that there are also different methodologies forcalculating the value of share-based compensation at the date on which it is granted. The mostcommon method for calculating the cost to a company is the Black-Scholes model, which esti-mates the value of a stock option upon exercise. Whatever the model used by individual com-panies, it should be noted that, in the majority of the countries reviewed for the purposes of thisstudy (principally Australia, France, Germany, Hong Kong (China), the Netherlands, South Africaand the United Kingdom), the regulations rarely lay down a specific method of calculation. As

a result, calculations of the value of share-based compensation vary not only across countriesbut also across companies within the same country.

In addition, there are problems inherent in all the existing models used to calculate share-basedcompensation. For example, among other drawbacks, they do not take into account the factthat stock options may be cancelled if an executive leaves the company, with the result thatthey overstate the cost of the options for the company. Furthermore, the Black-Scholes modelassumes that the stock options will be exercised upon expiration of the options. But in practice,executives may be free to exercise their options at any time between the vesting and the expiryof the options (see Hall and Murphy, 2000; Murphy, 1999). A recent study of stock optionsin Australia estimates that the average value at grant date ascribed to stock options amountedto only 26 per cent of the value of stock options actually exercised (Institutional ShareholderServices Australia, 2006).


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e wage o e average American worker. And wile CEO in Hong Kong (Cina) andSou Arica or example are paid muc le an eir US counerpar eir com-

penaion ill repreen beween and ime e wage o e average workerin ee counrie. Even average execuive earn beween and ime a muc aaverage employee.

I i alo inereing o noe a e dierence beween CEO and average execuivecompenaion varie ignicanly acro counrie. For example in Auralia and HongKong (Cina) CEO earn per cen more an e average execuive wile ey earnover per cen more in Germany e Neerland and e Unied Sae and per cenmore in Sou Arica.

Tee eimae mu owever be conidered wi ome cauion. Given a e exec-

uive pay end o rie wi rm ize e magniude o pay dierence beween execuive(o e large companie) and employee may ereore ave been overeimaed.26 One oer and daa preened in able . exclude are-baed remuneraion o enablecro-counry comparion. I i likely a i are-baed remuneraion and oer vari-able compenaion wic can repreen a izeable percenage o oal compenaion iincluded e rue dierence in compenaion beween execuive and employee a beenundereimaed. For example in e Unied Sae and e Neerland e variable com-

ponen (oen linked o rm perormance) repreen a ignican percenage o overallcompenaion.

The gap between executive and employee pay has grown over time:

cases of the United States and the Netherlands

An aemp a been made o obain daa on cange in execuive pay including are-baed compenaion beween and in e large companie in wo coun-rie e Neerland and e Unied Sae.27 Te coice o counrie wa deerminedmainly by e objecive o comparing developmen in wo counrie wi dieren cor-

porae governance radiion and dieren iniuional ramework. For example unlike

. According o eory (Murpy ); and a conrmed by empirical reearc in variou counrieincluding e Unied Sae (oi e al. ) Auralia (Merebi e al. ) Porugal (Fernande )France (Dardour ) and Germany (albei no conienly according o Haid and Yuroglu (); Rang

) execuive pay increae wi company ize.. In e even a companie were no lied on e naional ock excange or d id no provide comparabledaa i wa decided o include inead e nex bigge company on e li.

Table 1.1. Executive pay, 2007

CEO Average executive

Pay in US$(annual

average inmillions)

Pay as a ratioof averageemployee

wages

Pay in US$(annual

average inmillions)

Pay as a ratioof averageemployee

wages

Australia 6.0 135 2.4 53

Germany 6.8 148 3.8 82

Hong Kong 2.7 160 1.1 63

Netherlands 3.6 71 2.2 43

South Africa 1.4 104 0.9 71

United States 10.3 183 6.3 112

Source: I ILS estimates based on the annual reports of 15 of the largest companiesin the respective countries.


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e Unied Sae e Neerland i a relaively mall counry woe companie employa wo-ier governance yem. Elemen a ave long been ineren in execuive com-

penaion in e Unied Sae uc a compreenive dicloure o compenaion ande requen ue o are-baed compenaion ave emerged only relaively recenly in eNeerland (ee De Jong e al ; Du ue and Kabir ).

I wa poible o obain daa on are-baed compenaion in bo counrie. How-ever unlike e companie in e Unied Sae variou Duc companie did no providee inormaion neceary or e are-baed calculaion according o e Black-Scolemodel (ee box .). Te value o ock award and ock opion wa ereore deerminedby calculaing e value o e ock award veed in e year o e annual repor ande ock opion acually exercied in a year. Any direc comparion beween e wocounrie in i repec ould ereore be made wi ome cauion.

United States

e real average pay o American CEO including are-baed compenaion roerom over US$ million per year in o nearly US$ . million in . Tiincreae nearly per cen per year on average ar exceeded a o . per cen oroer execuive and . per cen or employee (g. . panel A).

Including are-baed compenaion ereore accenuae e gap beween CEOcompenaion and average alarie. In US CEO earned more an ime eaverage employee a again ime our year earlier (g. . panel B). Wen are-baed compenaion i included CEO alo earned nearly wice a muc a average execu-ive in compared o one and a al ime a muc in .

Clearly variable compenaion repreen an imporan conribuion o overall remu-neraion. In ac an analyi o e principal componen o compenaion reveal ain variable compenaion (are-baed and variable in ca) coniued nearly

per cen or more o oal compenaion or CEO and average execuive in e Unied

Sae. Furermore are-baed compenaion wa e dominan componen o oalcompenaion coniuing more an per cen or CEO and per cen or averageexecuive.

A quaniaive analyi o e compenaion componen provide addiional iner-eing inig wi repec o e evoluion o variable compenaion. For example rom o e alary componen o CEO and execuive manager roe a imilar

Panel A. Average annual increase in pay by category of employee,

adjusted for inflation, per cent

Panel B. Ratio of CEO compensation to average employee wages

CEO Average executive Average employee 2003 2005 2007

9.7

3.5

0.7

369

44 0

521

0

2

4

6

8

10

12

0

200

400

600

Figure 1.9. Evolution of executive pay versus average employee wagesin the United States, 2003-2007

Source: IILS estimates based on the annual reports of 15 of the largest companies in the United States.


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rae o around per cen (able .). For CEO owever variable compenaion in caincreaed rougly per cen and are-baed compenaion per cen werea or eaverage execuive variable compenaion in ca declined and are-baed compenaionincreaed per cen. Deerred paymen uc a penion rig roe more an percen beween and or bo CEO and average execuive bu uc paymenrepreen only a mall are o overall remuneraion (le an per cen in bo cae).

u no only i ere an increaing gap in pay beween CEO and employee(including oer execuive) in e Unied Sae bu variable compenaion accoun ora ignican and growing are o i dierence.

Netherlands

Te real average pay o Duc CEO including are-baed compenaion ripled romover US$ million per year in o over US$ million in . Te increae over per cen per annum on average marginally exceeded e grow in average execu-

ive pay ( per cen) bu clearly dwared e grow in average employee remuneraiono . per cen per annum (g. . panel A). A a reul in Duc CEO earnedover ime more an e average Duc employee compared o ime in (g. . panel B). Te gap beween CEO and oer execuive wa ar le dramaic:Duc CEO earned only . ime more an e average execuive in up rom. in .

Table 1.2. Increase in executive pay components,United States, 2003-2007, per cent

Salary andperquisites

Variablecompensation

in cash

Share-basedcompensation

Deferredpayment

CEO pay 20 45 70 294

Executive pay 18 -0.9 48 227

Source: ILS estimates based on the annual reports of 15 of the largest companiesin the United States.

Figure 1.10. Evolution of executive pay versus average employee wagesin the Netherlands, 2003-2007

Source: IILS estimates based on the annual reports of 15 of the largest companies in the Netherlands.

Panel A. Average annual increase in pay by category of employee,

adjusted for inflation, per cent

Panel B. Ratio of CEO compensation to average employee wages

CEO Average executive Average employee 2003 2005 2007

30.7

25.3

0.6

53.1

71.8

102.7

0

40

0

120

30

20

10

20

40

60

80

100


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20


In e Neerland execuive compenaion a alo undergone ome inereingdevelopmen in recen year a regard e compoiion o compenaion. Te relaionbeween xed and variable remuneraion in Duc compenaion package a radiion-ally been dieren rom e correponding package in US and UK companie in abaic alary coniue e mo imporan componen o compenaion. However eare o variable compenaion i increaing in imporance.

Fixed compenaion wic compried more an per cen o bo CEO andaverage execuive compenaion package in ell o per cen and per cenrepecively in . Inereingly i i mainly due o developmen in are-baed com-

penaion a airly recen penomenon in e Neerland wic increaed by morean per cen or CEO and more an per cen or average execuive beween and albei rom relaively low level (able .). In ac wile are-baed com-

penaion played only a marginal role in i coniued abou one ird o e com-penaion package or bo CEO and execuive in .28

Looking forward: potential impact of foodand commodity price hikes

Wile ome developmen in e global economy ave clearly beneed oe in e igeincome bracke oer ave made e poore wore o. Ti i paricularly e cae oriing ood and commodiy price paricularly uel price. Tee increae are par o ageneral inaionary rend o price or raw maerial parly linked o increaing demandor ood and uel rom newly indurialized economie uc a Cina. Declining ocko crude oil and diappoining arve ave alo conribued o e inaionary preure.Oer acor including peculaion in nancial marke and canging conumpion pa-ern are alo likely o be conribuing o riing ood and commodiy price.

Te peculiariy o ood and uel i a ey ave virually no ubiue. An increaein eir price doe no ereore generae a large decreae in conumpion o any increaein ood price aec oueold purcaing power. Moreover low-income oueold arelikely o be more adverely aeced in a ey pend a large proporion o eir incomeon uc good a illuraed by e example o India and e Unied Sae.

In India ince ood price ave grown by per cen compared wi . percen or non-ood price. Ti i prediced o ave a negaive eec on e purcaing

power o all urban oueold (g. .). Te only excepion o coure i oe oueold

. I ould be noed a even beore many Duc companie ad are-baed incenive programme

in place. However a are-baed compenaion i a relaively recen penomenon in e Neerlandnumerou ock award and opion ad no in ye veed. In addiion variou are-baedcompenaion programme gave only limied value a ock price were relaively low a a ime.

Table 1.3. Increase in executive pay components,Netherlands, 2003-2007, per cent

Salary andperquisites

Bonus Share-basedcompensation

Deferredpayment

CEO pay 50 174 5391 8

Average executive pay 35 163 3706 -9

Source: I ILS estimates based upon on the annual reports of 15 of the largestcompanies in the Netherlands.


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All households

Richest households(over 1925 Rupees)

1500-1925

1120-1500

915-1120

775-915

665-775

575-665

500-575

425-500

350-425

300-350

Poorest households(less than 300 Rupees)

0 1 2 3 4 5 6

0 0.1 0.2 0.3 0.4 0.5 0.6 0.7 0.8

All

Q5

Q4

Q3

Q2

Q1

Percentage points by income quintile(Q1 poorest quintile)

a produce ood and bene rom e increae in ood price bu i i le likely inurban area an rural one.

Food price inaion aec oe wo pend a larger proporion o eir income onood in paricular poorer oueold. For example e poore oueold in urban Indiaexperienced an eimaed drop in purcaing power o over ve per cen wile e ricein urban area in experienced only a drop o . per cen.29

Over e period - uel price inaion in e Unied Sae wa on averageour ime e inaion in e general conumer price index. In ac over e mo recen

period o e price o uel grew ix ime aer an e conumer priceindex. Te mo recen price increae in amouning o per cen adverely aec

e poore oueold (g. .). In paricular e poore per cen o oueold willee an eimaed drop in eir purcaing power nearly our ime greaer an a in erice oueold owing o e ac a ey pend a larger racion o eir ne incomeon uel: per cen a again . per cen.30

. An analyi o ood price elaiciie in India conrm a ood i conidered a neceiy. In oer word

price elaiciie are lower an and cloe o zero: . and . or rural and urban area repecively.. Fuel price elaiciie in e Unied Sae are alo lower an (neceiy) being on average equal o .acro oueold over e period -.

Note: Y-axis refers to monthly per capitaexpenditures (in Rupee).

Source: IILS estimates based onHousehold Expenditure Survey, India.

Source: IILS estimates based on consumer expendituresurvey (US Bureau of Labor Statistics).

Figure 1.11. Estimated declinein purchasing power of Indian urbanhouseholds resulting from rising foodprices, 2007 (percentage points)

Figure 1.12. Estimated declinein purchasing power of householdsin the United States resulting fromrising fuel prices, 2007


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C. Why is income inequality a matter of policy concern?

Riing inequaliie a documened in e previou ecion can be a ign o robu eco-nomic grow a ome member o ociey ge aead work arder or inroduce innovaive

produc and ervice. Indeed inequaliie may be linked o a number o developmenwic in e long run may generae unambiguou poiive eec. For example cerainrucural reorm uc a oe a were implemened in raniion economie in eearly may ave increaed income inequaliie bu i wa neceary in order oenure adequae incenive o work and inve.

On e oer and inequaliie may ave inef cien ocial and economic oucome.In paricular wen inequaliie become perien and ome group are yemaicallybarred rom e bene o grow e economic and ocial co are likely o ineniy aoe a e boom claim eir are o e naional income by any mean poible ucreaing a more unable macroeconomic environmen. Tere may alo be cae were

wealy group ry o block pro-grow policie i uc group ear a e opporuni-ie may be oo widely rediribued.

Te purpoe o i ecion i o review e evidence on cange in income ine-qualiy and e impac on ocial oucome and macroeconomic abiliy. I alo dicuelabour marke dicriminaion and poliical economy problem a arie rom diribu-ional iue.

Social and economic costs of inequality

Inequality and crime

Tere come a poin were income inequaliy increae black-marke aciviy and prop-

ery crime. I llegal aciviie oen provide beer reurn or le a uen oueoldeven wen e rik o punimen i aken ino accoun (Glaeer ): inequaliy maydilue e deerren eec o ancion wen low-income oueold are a badly o ou-ide prion a ey are inide (McAdam ). Moreover egregaion ariing rom eunequal diribuion o income reinorce opporuniic beaviour a bo end o eincome pecrum (Bowle Coi and Hopeniz ) a people belonging o dierenocial raa ave ewer ineracion. Laly and more ubly riing inequaliy maylower e amoun o policing a ricer oueold aemp o limi public pending on

police orce in low-income neigbourood.Reviewing e empirical lieraure Soare () conrm e poiive relaionip

beween inequaliy and crime rae. Quaniaively reducing inequaliy i ar more eec-

ive in reducing crime an uc alernaive a beer educaion or policie o promoegrow. According o e udy i inequaliy were reduced rom e level oberved inColombia o oe ound in e Unied Kingdom (rougly correponding o andarddeviaion in e ample) e would al l by per cen and conac crime by per cen.A imilarly large increae in educaion pending or a percenage poin increae in averagegrow would bring crime rae down by only per cen and per cen repecively.

Inequality and health

Ric people live longer (Deaon ) werea low-income oueold oen lack e

reource o mainain and improve eir eal au. Acce o ambulaory or aionaryeal-care ervice i more limied or

Documents

World of Work Report 2008: Income Inequalities in the Age of Financial Globalization