Tuesday, 9 December, 2014

Today’s new report from the OECD adds to the mounting evidence that high levels of inequality harm economic growth. The research suggests that inequality reduced the UK’s growth between 1990-2010 by 8.6%. By my quick maths this could mean the UK economy is as much as £70.6bn[i] smaller due to our high levels of inequality - a truly astonishing figure and an indication of how much our extreme inequality is hurting society and damaging our economy.

The OECD explains that focusing on growth at the expense of inequality will be self-defeating in the long run, and allowing income gains to accrue to the top rather than the bottom half of society will result in a less wealthy society overall. But importantly the OECD also looks in detail at the mechanisms for reducing inequality.

The OECD’s findings back up the IMF’s assertions earlier in the year that redistribution has an important role to play in reducing inequality and increasing growth. Their report suggests that rather than redistribution acting as a barrier to growth it is instead an important part of facilitating it. They also find that the important element which reduces growth is net inequality (after direct taxes and social security transfers) rather than inequality of wages.

Whilst inequality across a society as a whole reduces growth (measured by the GINI coefficient) they find that the most important element is between the middle and the bottom 40%[ii]. This suggests that policies such as the expansion of tax credits and in work social security support could play an important role in supporting long term economic growth. Previous OECD research concurs with research from The Equality Trust that one important part in securing funds for redistribution is by increased taxation on those on top incomes. The OECD also sees additional scope for funding this through tackling tax loopholes exploited by those on large incomes.

Today’s OECD report also highlights how income inequality can also damage the mechanisms that make equality of opportunity possible. It finds that whilst increased inequality does not harm the educational prospects of the middle or the top it does damage the education of those from less privileged households. In countries with high levels of inequality children from less privileged households have lower scores in numeracy and literacy, are less likely to go to university or other tertiary education, and are less likely to be employed during their working life. The OECD recommends that government’s should focus more on improving education for those from the poorest backgrounds and addressing resource barriers that prevent access to high quality education.

However this finding from the OECD should be considered in the context of recent research from the UK suggesting that education may not be the solution to reducing inequality and increasing social mobility. Recent research from the Institute of Education has found that there are many other important factors beyond school quality in determining later inequality. A child from a more privileged family is more likely to attend university than someone else with the same A Level and O level resultsThe research has found that the majority of the difference between more unequal countries like the UK and the US and more equal ones like Sweden comes through unequal returns to education rather than educational inequality, and unequal opportunities for people with similar educational qualifications. This suggests that simply improving education may not close the opportunity gap or the subsequent level of  inequality. The solution may instead rely on large changes to the labour market and further redistribution.

Tim Stacey, Senior Policy and Research Advisor


[i] Based on the UK GDP growing £815.9bn in this time period

[ii] The OECD acknowledge that they are unable to examine the effect of the top 1% on growth due to inadequate data.