The Widening Gaps between Rich and Poor in the OECD Countries since 2000 - Assignment Example

Debating Globalisation Describe and explain the widening gaps between rich and poor in the OECD countries since 2000 The past two decades witnessed unexpected widening of economic gap between rich and poor in most of the OECD countries. This is a major threat to the world economy as it is causing backwardness of major section of global population. According to OECD, inequality in income distribution has been observed to be higher in mid-2000s than it was in mid-1980s. Over the past two decades, only few countries, such as France, Spain and Greece, have achieved greater income equality. The OECD report raised alarm about continuous growth of inequality and poverty in almost 70% of its member countries. The most affected countries as per the report are Canada, Norway, Germany and the United States. The inequality is a global risk from both political and economic perspectives. Moreover, it suggests that large gap between the poor and rich posed a major challenge of political power being controlled by a handful of wealthy individuals (Atkinson, 2003). According to an article ‘Gap between rich and poor growing fastest in Britain’ in Telegraph (2011), tax rates have declined and income of top 1% of earners such as bankers, executives and managers in Britain has doubled since 1980 while benefits to the poor have declined severely to make them poorer. The low tax rate should have contributed towards shrinking of the gap, but it could not manage to keep pace with soaring wages of the rich in the country. The Gini coefficient, that measures the income distribution in a society, shows that since 1975, income inequality has been rising faster than other countries. Gini coefficient is considered as the benchmark of inequality, where zero is equivalent to equal income distribution and one stands for all income being accumulated to the richest person. Hence, an increasing Gini coefficient is considered unhealthy for an economy (Weeks, 2005). The economic cost of higher income disparity is increase in wastage of human resources. It implies that either a large portion of working population will be unemployed or they will be underemployed. Surprisingly, inequality is not limited to income structure; it affects opportunity and outcomes as well. According to a recent report by OECD (2008), it was found that the earning of 10% of the richest individuals in OECD countries is nine times more than that of 10% of the poorest individuals. In different countries, the statistical figures are different but the only common factor is that the disparity is high. The report further exclaimed that when poverty was measured nation wise, the result was equally alarming. In this context, it is important to note that poverty is a relative measure and is calculated by comparing with benchmark, which is the ‘national living standard’ in the form of median household earning. One example of relative poverty that was reflected in the report was that in 2005, around 10% of population in OECD countries had income lower than half of the national median value. According to a new OECD study (2011a), ‘Divided we Stand: Why Inequality Keeps Rising’, even in egalitarian countries such as Sweden, Denmark and Germany, the income gap has widened considerably – it has grown from 5 to 1 in 1980s to 6 to 1 presently. The figure is 10 to 1 in Korea, United Kingdom, Japan and Italy. Turkey, Israel and the United States exhibit a rise to 14 to 1. However, the worst scenario is in Mexico and Chile where the income disparity is as high as 25 to 1. It is very disappointing to note that countries that have wide income distribution are likely to have greater degree of widespread poverty. In past 20 years, poverty and income distribution have risen significantly, affecting majority of OECD countries. Another interesting yet alarming fact has been disclosed by the OECD report, which is, the income disparity has increased by about 8% in past 20 years (from mid-1980s to mid-2000s). The statistical figure may sound irrelevant but it is equivalent to around $880, taken from the poor and given to the rich. Moreover, the percentage of poor population having income below national median has also increased among OECD countries. The poverty distribution is not consistent across nations as well as age groups. In past two decades, the risk of poverty for aged people has shifted to younger individuals. Studies suggest that the probability of single individuals, single parents and families with children being poor is higher than ever. Unlike 1980s, when poverty affected the age group of 66-75 years more, poverty rate has increased tremendously among single parents and young adults since 2000 (Lynch, 2013). Another disturbing fact has been highlighted by OECD in its report on income disparity, ‘Divided we stand’, that income from capital and work in most of countries has been dwindled relentlessly due to the economic crisis. The household market income is decreasing at 2% per year due to lower income from work and to some extent, capital. The unemployment is growing continuously and so is the reduction in real wage rate. The impact of unemployment is predominantly high in Iceland, Ireland, Greece, Mexico and Spain, while earnings from self-employment have also declined in these countries considerably. It was noticed that factors that cushioned the decline in household market income are personal taxes and social transfers. However, disposable income of individuals lowered at a lesser rate than that of market income. The social transfers increased during the recession period as several unemployment and other benefits were claimed by individuals who lost their jobs. In addition, the OECD countries introduced a variety of fiscal stimulus packages for cushioning the income fall, thereby amplified the redistribution effect. Public transfers were received by households in all member countries of OECD; the only exception to this was Turkey. Ironically, strong increase in public transfers was noticed in Slovak Republic, a country where household income grew continuously from 2007 to 2010. In addition, countries such as Finland, Norway and Luxembourg witnessed fall in market income being either compensated or exceeded by public transfers. Conversely, the low-income group faced major adversity during the recession period as they lost more because of the crisis and earned little benefit from the recovery. Almost all the member countries of OECD, witnessed stagnant real disposable income while Greece and Spain were the most affected ones (Deutsche Welle, 2014). The Gini coefficient shows that inequality has affected at least 17 of 22 OECD countries when current data was compared with that of 1980s. The condition in BRIC (Brazil, Russia, India and China) countries is worst as except for Brazil, the other countries exhibited the income gap of 50 to 1, on average. The OECD report identified certain factors that may have certain degree of impact (positive, negative or neutral) on income inequality: Studies suggest that income disparity and growing unemployment has little to do with globalisation. Even though, foreign trade and foreign direct investment has risen significantly in past few years. Furthermore, the import from emerging economies such as China and India had almost no consequence on the in equality in the OECD countries. Although globalisation was ruled out as a non-relevant factor in economic inequality, technology is considered to have a significant role in unequal income distribution. It was gathered from reports of OECD that technological innovations has benefitted those individuals more who have greater knowledge in this field. Individuals who had abilities to manage technologies related to information and communication, especially in financial sector, witnessed soared earnings while workers with less or no knowledge of the same were left empty-handed. Consequently, the earning gap between skilled and unskilled work force increased significantly. With technological advancement, institutional changes and new regulatory reforms were introduced. These changes caused increase in employment opportunities but at the cost of high income disparity. These modifications were made so that competition can be strengthened for the commodity and service markets and a formal structure can be created for the labour market. It caused employment creation for many underpaid and unemployed workers but from logical point of view, the entry of lower income groups in the employment market only increased the income gap. Increase in part-time workers and atypical labour contracts while decrease in collective bargaining schedules further contributed to unequal income distribution. The growing demand as well as supply of skilled workforce in the economy as a consequence of regulatory, technological and institutional changes has contributed to a certain extent to reduce income disparity and unemployment. It was also indicated by the report that change in family structure has triggered diversification of household income and reduction in economies of scale. Marriage behaviour has also impacted the income distribution as presently, individuals prefer to marry individuals that belong to similar income bracket. In OECD countries not only income inequality but also non-income inequality is prevailing and it is comparatively high. However, about 7% of population enjoys moderate earning from capital investment. As it has already been mention, the taxation system in the OECD countries has not been sufficiently effective and as a consequence, the redistribution of income has declined subsequently. The various reasons that were recognised in this regard are decrease in benefit levels, tightened eligibility criteria for social protection and failure of public transfer to the low income earners. The report further identified that a number of income inequality drivers are similar in emerging as well as OECD countries, only they have different execution platforms. It has acknowledged that in emerging economy, large informal employment sector is the key driver of income disparity. As this sector, engage individuals in low productive jobs for low wages (OECD, 2014). There are certain macro-economic factors that better explain the change in income and poverty in terms of increasing inequality. They are being explained as follows: Demography: Certain demographic transitions are being considered to be responsible for about 20% income and wealth gap in countries such as Australia, Canada, France, Germany and the United Kingdom. These transitions include changes in family pattern (single parents and limited number of children) and longevity. Labour market: Income variation is mainly caused by changes in labour markets, such as, demand and supply of skilled and unskilled labours. Labour market is considered important because it is a major source of income for general households. It was observed that the income difference increased because the better-paid individuals tend to outperform others. Redistribution: Government plays an important role in maintaining balance in income and living standard of individuals. Taxes and subsidies are the ways through which government controls income redistribution in a country. However, in OECD countries such efforts have proved futile in controlling the widening income and poverty gap. Indirect factors: There are certain indirect taxes that affect living standards of individuals such as value added tax, service tax and excise duties. Higher taxes result in fewer goods at more prices. The income gap before and after considering indirect taxes were found surprisingly high in countries such as Finland, Norway, Denmark, Hungary and Sweden due to high consumption tax rate. While such variation was not found in Australia, Canada, Japan, Mexico and the United States due to low consumption tax rate (OECD, 2008). Conclusion In past few years, the situation of income and poverty gap has widened very rapidly. It was observed that younger individuals are worst sufferer of this situation while older generation were substantially shielded from this after effect of the crisis. Different countries were to be affected differently and currently the situation is a matter of huge concern among all the countries. To conclude, demographic factors and social changes were found to be the greatest drivers of economic inequality. In addition, labour market also has significant contribution in the widening gap and it is the only factor which can be controlled by government. According to OECD, the only solution to minimise the gap is by improving education sector and knowledge training for workforce worldwide (OECD, 2011b). Reference list Atkinson, A. B., 2003. Income inequality in OECD countries: data and explanations. CESifo Economic Studies, 49(4), pp. 479-513. Deutsche Welle, 2014. OECD warns of widening income gap between rich and poor. [online] Available at: [Accessed on 01 July 2014]. Lynch, D., 2013. Growing Income Gap May Leave U.S. Vulnerable. [online] Available at: [Accessed on 01 July 2014]. OECD, 2008. Growing Unequal? [pdf] OECD. Available at: [Accessed on 01 July 2014]. OECD, 2011a. Divided We Stand: Why Inequality Keeps Rising. [pdf] OECD. Available at: [Accessed on 01 July 2014]. OECD, 2011b. Society: Governments must tackle record gap between rich and poor, says OECD. [online] Available at: [Accessed on 01 July 2014]. OECD, 2014. Rising inequality: youth and poor fall further behind. [pdf] OECD. Available at: [Accessed on 01 July 2014]. Telegraph, 2011. Gap between rich and poor growing fastest in Britain. [online] Available at: [Accessed on 01 July 2014]. Weeks, J., 2005. Inequality trends in some developed OECD countries. New York: UN. Bibliography Atkinson, A. B. and Brandolini, A., 2001. Promise and pitfalls in the use of "secondary" data-sets: Income inequality in OECD countries as a case study. Journal of economic literature, pp. 771-799. Atkinson, A. B., Marlier, E., Montaigne, F. and Reinstadler, A., 2010. Income poverty and income inequality. [pdf] Eurostat. Available at: [Accessed on 01 July 2014]. Ceci, S. J. and Papierno, P. B., 2005. The rhetoric and reality of gap closing: when the" have-nots" gain but the" haves" gain even more. American Psychologist, 60(2), pp. 149-153. Gottschalk, P. and Smeeding, T. M., 2000. Empirical evidence on income inequality in industrialized countries. Handbook of income distribution, 1, pp. 261-307. Krueger, D. and Perri, F., 2006. Does income inequality lead to consumption inequality? Evidence and theory. The Review of Economic Studies, 73(1), pp. 163-193. Ravallion, M., 2001. Growth, inequality and poverty: looking beyond averages. World development, 29(11), pp. 1803-1815. Read More