Assessing income inequality in

OECD countries: Trends and

Prospects

Peter Whiteford, Crawford School of Public Policy

Director, Social Policy Institute,

https://socialpolicy.crawford.anu.edu.au/

peter.whiteford@anu.edu.au Twitter: @WhitefordPeter1

Outline

• Inequality – levels and trends

• Explanations

• The role of public policy

• The curious case of Korea

• Prospects

2

Income inequality in OECD countries,

2014 or nearest year

3

Trends in inequality in advanced and

emerging market economies

Trends in inequality in OECD countries

• Over the two decades prior to the onset of the global economic crisis, real disposable household incomes increased by an average 1.7% a year in OECD countries.

• In a large majority of them, however, the household incomes of the richest 10% grew faster than those of the poorest 10%, so widening income inequality.

• Differences in the pace of income growth across household groups were particularly pronounced in some of the English-speaking countries, some Nordic countries, and Israel. In Japan, the real incomes of those at the bottom of the income ladder actually fell compared with the mid-1980s.

Left Behind?

6

Trends in household income inequality in Australia,

1981-82 to 2015-16 Gini coefficient

7

0.24

0.26

0.28

0.3

0.32

0.34

0.36Johnson and Wilkins ABS

Trends in real average equivalised incomes of

working age households by deciles (% change per

year), Australia, 1981 to 1995

8

Trends in real average equivalised incomes of working

age households by deciles (% change per year),

Australia, 1995 to 2010

9

Inequality has risen in English-speaking

countries, at different rates at different times

10

0.28 0.28

0.270.27

0.31

0.33

0.320.32

0.33

0.37

0.20

0.22

0.24

0.26

0.28

0.30

0.32

0.34

0.36

0.38

Australia Canada New Zealand UK USA

1980 1985 1990 1995 2000 2005 2010

Explaining trends in inequality

The ‘build up’ approach to income

Full-time labour income

Labour income all workers

Market income of recipients

Household market income

(all)

Household gross

income(all)

Household disposable

income (all)

Household final

income (all)

Final equivalised household

income (all)

Wages and hours worked

of full-time employees

Wages and hours worked of part-time employees &

the self-employed

Returns to owned

capital & private

transfers

Household formation

Direct government payments to

the household

Direct government taxes paid by

the household

Indirect government payments &

indirect taxes paid to and

by the household

Adjustment for household size & composition (equivalisation)

Dis

trib

uti

on

Pro

xim

ate

fact

or

Individual income of recipients Household income (all households)

Explaining trends in inequality in OECD

countries• Increases in household income inequality have been largely driven by

changes in the distribution of wages and salaries, which account for 75% of household incomes among working-age adults. With very few exceptions (France, Japan, and Spain), the wages of the 10% best-paid workers have risen relative to those of the 10% lowest paid.

• This was due to both growing earnings’ shares at the top and declining shares at the bottom, although top earners saw their incomes rise particularly rapidly (Atkinson, 2009).

• Earners in the top 10% have been leaving the middle earners behind more rapidly than the lowest earners have been drifting away from the middle.

• Changes in the structure of households due to factors such as population ageing or the trend towards smaller household sizes played an important role in several countries.

• Finally, income taxes and cash transfers became less effective in reducing high levels of market income inequality in half of OECD countries, particularly during the late 1990s and early 2000s.

Explaining trends in inequality in OECD

countries• Globalisation has been much debated as the main cause of

widening inequality.

• From a political point of view, protectionist sentiments have

been fuelled by the observation that the benefits of

productivity gains in the past two decades accrued mainly –

in some cases, exclusively – to highly skilled, highly

educated workers in OECD countries, leaving people with

lower skills straggling.

• From a conceptual point of view, the standard reading of

traditional international trade theory is that increased trade

integration is associated with higher relative wages of

skilled workers in richer countries, thus contributing to

greater inequality in those countries.

Explaining trends in inequality in OECD

countries• Advances in information and communication technology (ICT) are

often considered to be skill-biased and, therefore, an inequality-increasing factor.

• Some studies put the ICT revolution at the forefront of their explanation of inequality: the IMF (2007), for example, found that “technological progress had a greater impact than globalisation on inequality within countries”, while an OECD report (OECD, 2007) suggests that “technical change is a more powerful driver of increased wage dispersion than closer trade integration”.

• In practice, it is very difficult to disentangle technological change from globalisation patterns that also increase the value of skills. Advances in technology, for instance, lie behind the fragmentation of economic activities and the offshoring of production. As Freeman (2009) puts it, “offshoring and digitalisation go together”.

The role of the firm

• Inequality within and between firms

• CEO and executive remuneration

• Outsourcing

• Differences between industries

• Indicators– Ratio of executive pay to median earnings in firms

– Gender pay gaps

– Risk-shifting behaviour (pensions, health care, hours of work)

– Tax compliance

– Locational issues

16

Explaining trends in inequality in OECD

countries• Policy choices, regulations, and institutions can shape how

globalisation and technological changes affect the distribution

of income.

• The tax and transfer systems and government services can

reduce inequality significantly.

• They can also influence income distribution directly, e.g.

through deregulation in product markets, changes in social

transfers, wage-setting mechanisms, or workers’ bargaining

power.

• Connecting these factors with overall earnings inequality and

household income inequality is not straightforward, as

regulatory and policy reforms may have counteracting effects

on employment and wage inequality among workers.

The impact of public policy

18

Social spending, OECD, 2014 or nearest year (%

of GDP)

Spending on cash benefits Spending on Health and Services

19

9.8

8.6

0 5 10 15 20 25

Mexico

Korea

Chile

Iceland

Turkey

Australia

Israel

Canada

United States

New Zealand

Estonia

United Kingdom

Switzerland

Slovak Republic

Norway

Sweden

Czech Republic

Netherlands

OECD

Japan

Ireland

Poland

Germany

Denmark

Luxembourg

Hungary

Slovenia

Greece

Spain

Finland

Portugal

France

Austria

Italy

Belgium

11

10.4

0 5 10 15 20

TurkeyMexico

ChileEstonia

KoreaIsrael

GreecePoland

PortugalSlovak Republic

SloveniaHungary

IrelandCanada

Czech RepublicSwitzerland

LuxembourgOECDSpain

ItalyAustria

United StatesIceland

AustraliaNorway

JapanNew Zealand

United KingdomBelgium

GermanyNetherlands

FinlandFrance

DenmarkSweden

Australia’s social security system is more targeted

to the poor than any other OECD countryRatio of transfers received by poorest 20% to those received by richest 20%Source: Calculated from Tables 3 and 5, OECD , 2014, http://www.oecd-ilibrary.org/economics/economic-growth-from-the-household-

perspective_5jz5m89dh0nt-en

0.1 0.2 0.3 0.4 0.6 0.6 0.7 0.7 0.8 0.8 0.9 1.0 1.1 1.1 1.1 1.1 1.2 1.3 1.3 1.5 1.62.0 2.1

2.6 2.83.2

5.2

7.0

12.6

0

2

4

6

8

10

12

14

Ratio

of tr

ansfe

rs to p

oore

st 20%

over

transfe

rs to r

ichest 20%

The progressivity of direct taxes is highest in the

English speaking countries and lowest in the Nordic

countriesConcentration coefficient for direct taxes around 2005

The curious case of Korea

• Below average disposable income inequality – 0.30 in 2014 (OECD

0.31)

• Very little redistribution through taxes and transfers – - 0.039 in 2014

(-0.146 in Australia, -0.155 for OECD to -0.25 in Ireland )

• Explained by low market inequality (0.341) - Australia 0.458 and

0.50 or over in many European countries and USA

• But Korea has widest gender wage gap in OECD, high inequality

between formal and informal workers, high relative poverty even

among formal workers, and very wide differences between older

people and people of working age – lowest average income to

working-age, highest poverty rate (nearly 50%) and widest poverty

gap, plus lowest relative wealth.

• Explanations: data differences (not in OECD), still relatively few

older people, living arrangements

22

Prospects

• Labour market changes and pressures on

taxes and spending

• Demographic change

• Korea – challenges of demographic

change – but relative position of older

households could change rapidly

23