Reconciling inequality and growth objectives: can it be done?

Isabell Koske

OECD, Economics Department

23 January 2012

Background of the study

Economic context

• Income inequality was high and rising in many OECD countries even before the crisis.

• Possible trade-offs and/or complementarities between growth and inequality goals.

Main objective of the study:

• Identifying win-win policies that help foster growth and reduce income inequality, but also those that entail trade-offs between the two objectives.

Co

nte

xt

Inequality in household disposable income varies considerably across countries.

Gap between the 10th and the 90th centile and the Gini index Household disposable income in the late 2000s

Inco

me

ineq

ual

ity –

an o

verv

iew

0.0

0.1

0.2

0.3

0.4

0.5

0.6

0

1

2

3

4

5

6

7

8

9

10

DN

KC

ZEN

OR

SVN

SVK

HU

NFI

NSW

EA

UT

ISL

BEL

NLD

FRA

LUX

DEU

CH

EG

RC

PO

LN

ZLC

AN

EST

OEC

DIT

AIR

LA

US

ESP

GB

RKO

RP

RT

JPN

USA

TUR

ISR

CH

LM

EX

Centile ratio (left scale) Gini coefficient (right scale)

Understanding inequality: accounting framework and policy levers

Individual

labour income

Household

labour income

Household

market income

Household disposable

income

Household adjusted

disposable income

Family formation

and composition

Self-employment

& capital income

Taxes & cash

transfers

Individual consumption

of public goods

Education & labour market policies, migration & gender policies etc.

Cash transfers and tax policies

Education & health (access & coverage) policies

Tax policies (wealth, capital income)

Family policies (child and elderly care), etc.

Inco

me

ineq

ual

ity –

an o

verv

iew

The sources of inequality in household labour income vary across countries.

The

dis

trib

uti

on

of

lab

ou

r in

com

e

0.20

0.25

0.30

0.35

0.40

0.45

0.50

0.55

0.60

0.65

0.70

0.75

CH

E

BEL

DN

K

SWE

FIN

SVK

CZE

NO

RFR

AIS

LSV

NA

US

DEU IT

A

NLD ES

P

EST

HU

N

AU

TO

ECD

JPN

LUX

IRL

ISR

KOR

GB

RG

RC

PO

LC

AN

PR

TC

HL

USA

BR

A

Indivdiual labour income (full-time employed)Individual labour income (working-age population)Household labour income

Labour income inequality in the OECD Gini coefficients, late 2000s

Where in the distribution are individual labour earnings most dispersed?

Centile ratio 90/50

The

dis

trib

uti

on

of

lab

ou

r in

com

e

0.0

0.5

1.0

1.5

2.0

2.5

3.0

BEL

SWE

FRA

ITA

FIN

CH

E

PR

T

NO

R

NZL

DN

K

GR

C

JPN

NLD ES

P

OEC

D

AU

T

PO

L

CZE

AU

S

HU

N

ISL

GB

R

IRL

ISR

CA

N

DEU

KOR

USA

0.0

0.5

1.0

1.5

2.0

2.5

3.0

NO

R

ITA

SWE

BEL

DN

K

FIN

NLD IS

L

DEU CZE

CH

E

JPN

NZL

CA

N

AU

S

AU

T

OEC

D

ESP

GB

R

FRA

IRL

GR

C

PO

L

KOR

USA

HU

N

ISR

PR

T

Labour income inequality among full-time employees, 2008 Centile ratio 50/10

Workers in the financial sector enjoy an income premium, particularly at the top.

Income premium of working in financial intermediation rather than in manufacturing

Cross-country average, 2008 or latest available year

The

dis

trib

uti

on

of

lab

ou

r in

com

e

0%

10%

20%

30%

40%

50%

60%

10 20 30 40 50 60 70 80 90

Income quantile

Higher union membership tends to be associated with lower wage dispersion.

Wage premium of union membership Cross-country average, 2008 or latest available year

The

dis

trib

uti

on

of

lab

ou

r in

com

e

-10%

0%

10%

20%

30%

40%

10 20 30 40 50 60 70 80 90

Income quantile

Taxes and transfers reduce market income inequality by about one-fourth.

The

tax

and

tra

nsf

er s

yste

m

Gini coefficient of market income and disposable income Late 2000s

0.00

0.05

0.10

0.15

0.20

0.25

0.30

0.35

0.40

0.45

0.50

0.55

SVN

DN

KC

ZESV

KN

OR

BEL FIN

SWE

AU

TC

HE

LUX

FRA

NLD

DEU

KOR

ISL

OEC

DES

TP

OL

ESP

NZL

JPN

AU

SC

AN

ITA

GB

RP

RT

ISR

USA

CH

L

Market income Disposable income

In most, but not all countries the redistributive impact of transfers is higher than that of taxes

The

tax

and

tra

nsf

er s

yste

m

The redistributive impact of taxes and transfers Point reduction in concentration coefficients, late 2000s

0.00

0.02

0.04

0.06

0.08

0.10

0.12

0.14

0.16

0.18

FIN

DN

KIR

LC

ZESW

ED

EUG

BR

BEL

AU

SN

OR

SVN

EST

NZL

AU

TIT

ASV

KN

LDO

ECD

ISR

CA

NLU

XP

OL

PR

TU

SA JPN

FRA

ESP

CH

EIS

LC

HL

KOR

Household taxes Public cash transfers

The size and composition of public cash transfers vary across OECD countries.

Public cash transfers to households Percent of GDP, 2007

The

tax

and

tra

nsf

er s

yste

m

0

2

4

6

8

10

12

14

16

18

20

MEX

KOR

ISL

CH

LTU

RC

AN

AU

SU

SA EST

ISR

IRL

NZL

SVK

GB

RN

LDN

OR

JPN

CH

EO

ECD

CZE

LUX

DN

KSW

EES

PSV

NG

RC

POL

FIN

HU

ND

EU PRT

BEL ITA

FRA

AU

S

Old age Incapacity Family Unemployment Other social policy areas

0

10

20

30

40

50

60

DN

KSW

EIT

AB

ELN

OR

AU

TFI

NFR

AH

UN

NLD

LUX

SVN

DEU ES

TC

ZEG

BR

ISL

OEC

DC

AN

PO

LN

ZL ISR

ESP

PR

TG

RC

CH

ESV

KIR

LJP

NA

US

KOR

TUR

USA

Personal income taxes Corporate income taxesSSCs and payroll taxes Taxes on goods and servicesOther Progressivity of household taxes (right axis)

% of GDP

The redistributive impact of the tax system is a function of its size and progressivity.

The

tax

and

tra

nsf

er s

yste

m

Size and composition of total tax revenues 2009

Measures to improve human capital are clear win-win strategies.

Imp

act

of

po

licie

s

A rise in: Employment

rate Earnings equality

Labour income equality

GDP per capita

Equity in education ? + + +

Upper-secondary and tertiary graduation rates

? + + +

Initiatives to foster the integration of immigrants

+ + + +

Initiatives to raise female labour force participation

+ + + +

Initiatives to combat discrimination

+ + + +

In the area of labour and product markets, the equality effects depend on the precise measure.

A rise in: Employment

rate Earnings equality

Labour income equality

GDP per capita

Minimum wage (relative to median wage)

0/- + ? 0/-

Unionization ? + + ?

Legal extensions of collective wage agreements

- ? - -

The gap between protection on regular vs. temporary work

- - - -

Product market regulation - 0/+ ? -

Imp

act

of

po

licie

s

Many tax policies imply trade-offs with respect to the growth and distribution objectives.

Revenue-neutral tax changes: Disposable

income equality

GDP per capita

Change tax mix from income to consumption tax

- +

Change tax mix from income to real estate tax

- +

Change tax mix from income to wealth and inheritance tax

? +

Increasing top PIT rates and tax free allowances

+ ?

Cutting tax expenditures and marginal rates

+ +

Imp

act

of

po

licie

s

Contact information and underlying documents.

Contact person • Isabell Koske (Isabell.Koske@oecd.org)

Webpage

• www.oecd.org/economy/goingforgrowth/inequality.

Going for Growth 2012

• Reducing income inequality while boosting economic growth: can it be done?, Chapter 5

OECD Economics Department Policy Notes Series

• Policy Note No. 8: Inequality in labour income – What are its drivers and how can it be reduced?

• Policy Note No. 9: Income inequality and growth – The role of taxes and transfers Fu

rth

er in

form

atio

n

OECD Economics Department Working Paper Series

Working Paper Series on “Less income inequality and more growth – Are they compatible? ”

• WP 924: Part 1. Mapping income inequality across the OECD • WP 925: Part 2. The distribution of labour income • WP 926: Part 3. Income redistribution via taxes and transfers across

OECD countries • WP 927: Part 4. Top incomes • WP 928: Part 5. Poverty in OECD countries • WP 929: Part 6. The distribution of wealth • WP 930: Part 7. The drivers of labour earnings inequality – An

analysis based on conditional and unconditional quantile regressions • WP 931: Part 8. The drivers of labour income inequality – A review of

the recent literature

Furt

her

info

rmat

ion