The Organization for Economic Cooperation and Development (OECD) has found that the divide between the richest 10 percent and poorest 10 percent in many of the world's wealthiest countries - including Germany, US and UK - has been growing. In a report released Monday, OECD said that this, in turn, had caused growth to slow.
In Germany in the mid-1980s, for example, the richest 10 percent of the population earned on average five times more per month than the poorest ten percent. Now, the richest earn seven times as much as the poorest 10%.
One result of the growing divide between rich and poor, the OECD report showed, was that gross domestic product (GDP) - measuring the general level of economic activity - was smaller than it would be if inequality had not increased.
In Germany, real inflation-adjusted GDP growth between 1990 and 2010 was 26%. We estimate that had inequality remained stable, and not increased, during those two decades, GDP would have grown by about 31%. So the German economy would be five percent bigger now had inequality not increased, said OECD economist Michael Förster, a co-author of the OECD study.
Germany is a country whose social market economy is set up to maintain a broad middle class. The situation is more extreme in many other OECD countries, according to the report, entitled Trends in income inequality and its impact on economic growth.
Strong and sustainable GDP growth was only possible if governments take energetic and decisive measures against further increases in inequality, the OECD said. Suitable measures could include income or wealth redistribution through tax measures, and transfers of money and benefits to the poor.
The OECD recommends three types of policy intervention to reduce inequality, which can be implemented in different mixes depending on the socioeconomic conditions and policy preferences in different countries, Förster said.
The three pillars are: an inclusive labor market - e.g. structuring labor markets to ensure low unemployment. [Secondly] investments in human capital - which means good skills training and education programs. And finally, redistribution of some of society's wealth or income toward the relatively poor through various transfer programs, he explained.
Förster said that the results reported in the new OECD study provide further statistical evidence of negative effects of growing inequality, complementing - using different sets of data - the results found by French economist Thomas Piketty, whose 2013 book Capital in the 21st Century has become one of the most talked-about economics books in decades.
Poorer citizens tend to spend every extra euro or dollar of income. In economists' jargon, poor people's propensity to spend any extra income is much higher than that of the rich, who tend to save extra income.
On average, much of the extra money taken in by the wealthy tends to sit unspent in the form of financial savings, rather than being spent into circulation in the real working economy. That directly translates into a reduction in GDP compared to an economy with a less unequal distribution of wealth or income.
The impact of inequality on growth stems from the gap between the bottom 40 percent and the rest of society, not just the poorest 10 percent, the OECD report said. Improvements and increasing access to public services like good education, training and healthcare, as well as cash transfers, are essential to generate greater equality of opportunities in the long run.
The report also found no evidence that redistributive policy such as taxes and social benefits harm economic growth, provided the policies are well designed and implemented.
In the UK, rising inequality cost the economy almost nine percentage points of GDP growth between 1990 and 2010, the think tank said. The US lost almost seven points. The OECD also found that redistribution of wealth via taxes and benefits does not hamper economic growth.
This compelling evidence proves that addressing high and growing inequality is critical to promote strong and sustained growth and needs to be at the centre of the policy debate, said OECD's secretary general, Angel Gurría.
Countries that promote equal opportunity for all from an early age are those that will grow and prosper.
In the 34 countries that are members of the OECD, the gap between rich and poor is at the highest level in 30 years, the group said. The richest 10% in those states earn, on average, 9.5 times the poorest. In the 1980s, they earned 7 times as much.