What two issues are faced by high income nations?

Income inequality in OECD countries is at its highest level for the past half century. The average income of the richest 10% of the population is about nine times that of the poorest 10% across the OECD, up from seven times 25 years ago. Only in Turkey, Chile, and Mexico has inequality fallen, but in the latter two countries the incomes of the richest are still more than 25 times those of the poorest. The economic crisis has added urgency to the need to address inequality. Uncertainty and fears of social decline and exclusion have reached the middle classes in many societies. Arresting the trend of rising inequality has become a priority for policy makers in many countries.

In emerging economies, such as China and India, a sustained period of strong economic growth has helped lift millions of people out of absolute poverty. But the benefits of growth have not been evenly distributed and high levels of income inequality have risen further. Among the dynamic emerging economies, only Brazil managed to strongly reduce inequality, but the gap between rich and poor is still about five times that in the OECD countries.

The OECD analyses trends in inequality and poverty for advanced and emerging economies. It examines the drivers of growing inequalities, such as globalisation, skill-biased technological change and changes in countries’ policy approaches. And it assesses the effectiveness and efficiency of a wide range of policies, including education, labour market and social policies, in tackling poverty and promoting more inclusive growth.

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For more data on inequality, visit the OECD Income Distribution Database

OECD'S "COMPARE YOUR INCOME" WEB TOOL

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Breaking down barriers to gender equality in education, employment and entrepreneurship would create new sources of economic growth and help make better use of everyone’s skills.

Greater educational attainment has accounted for about half of the economic growth in OECD countries in the past 50 years, in large part thanks to an increase in girls reaching higher levels of education and greater gender equality in the number of years spent in school. Companies with a higher proportion of women in top management do better than others.

But on average, in OECD countries, women earn 16% less than men, and female top-earners are paid 21% less than their male counterparts. Women occupy less than a fifth of parliamentary seats around the world and their access to top positions in companies is even worse.

The impact of pay inequality is dramatic over a woman’s lifetime. Having worked less in formal employment, but having carried out much more unpaid work at home, many women will retire on lower pensions and see out their final years in poverty. Living an average of nearly 6 years longer than men, women over 65 are today more than one and a half times more likely to live in poverty than men in the same age bracket.

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While increasing inequality presents key challenges for all policymakers, tax policy has a particularly important role in addressing inequality and boosting economic growth. As pre-tax income inequality increases, the role of tax policy will only grow more important. Maintaining the overall progressivity of the tax code is a key priority in this regard. Moreover, countries are increasingly coming together to co-operate on international tax issues, to reduce the ability of high-wealth individuals and companies to shift assets and income offshore to avoid taxation. A wide variety of other policies are also on the agenda for many OECD countries.

Examples of policies that countries could consider implementing to tackle inequality include:

• Reducing social security contributions and payroll taxes on low-income workers, to encourage them to stay in the labour force and boost their skills, and to make them more attractive for companies to hire. 
• Abolishing or scaling back a wide range of tax deductions, credits and exemptions which benefit high income recipients disproportionately;
• Taxing as ordinary income all remuneration, including fringe benefits, carried interest arrangements, and stock options;
• Considering shifting the tax mix towards a greater reliance on recurrent taxes on immovable property;
• Reviewing the efficacy and effectiveness of wealth and inheritance taxes;
• Examining ways to tax capital income at the personal level at slightly progressive rates, and align top capital and labour income tax rates;
• Increasing transparency and international co-operation on tax rules to minimise “treaty shopping” (when high-income individuals and companies structure their finances to take account of favourable tax provisions in different countries) and tax optimisation;
• Broadening the tax base of the income tax to reduce avoidance opportunities and thereby the elasticity of taxable income;
• Developing policies to improve transparency and tax compliance, including continued support of the international efforts, led by the OECD, to ensure the Automatic Exchange of Tax Information between tax authorities.

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Progress in health status and life expectancy in OECD countries and in emerging economies has been remarkable, but not even. Large inequalities exist not only across countries, but also between population groups within each country. Inequalities in health status are due to many factors, including differences in living and working conditions and in behavioural factors, but also in access to and quality of health care. Despite significant progress in most countries, access to quality health care varies across the socio-demographic groups, including by sex, age, geographic area and for financial and non-financial reasons.

Greater emphasis on public health and disease prevention, along with improved access to health services, can improve the health status and life expectancy of disadvantaged groups. Most OECD countries have endorsed, as major policy objectives, the reduction of inequalities in health status and the principle of equal access to health care based on need. The OECD regularly monitors to what extent policies to reduce health inequality achieve their objectives and assesses the potential benefits and costs of various policy interventions.

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INEQUALITY AND EDUCATION

Inequalities which surface in the job-market are often entrenched during education, which puts those at the bottom at a serious disadvantage. Poorer students struggle to compete with their wealthier classmates and go on to lower levels of educational attainment, smaller salaries, and most strikingly, shorter lives. Data from 15 OECD countries shows that, at age 30, people with the highest levels of education can expect to live, on average, six years longer than their poorly educated peers.

Investing in education and training will pay long-term dividends for the economy, for individual well-being, and for the overall prosperity of our societies. Reaching excellence through equity is possible. For that, we need to develop more ambitious education and skills policies. Our evidence-based PISA and PIAAC initiatives highlight large inequalities in education and skills. They also demonstrate that there are major potential benefits to equip disadvantaged groups, such as low social-background students and low-skilled workers, to acquire better skills and compete for better-paying jobs.

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INEQUALITY AND INNOVATION

Innovation and entrepreneurship are major potential sources of growth with strong spillover benefits across the economy. But in the past, innovation policies have generally been assessed in terms of their impact on aggregate income growth. However, these impacts are unlikely to be “neutral” as they might affect individuals and groups differently (“social inclusiveness”). All individuals and businesses are not on an equal footing regarding innovation capacities and access to the corresponding benefits (“industrial inclusiveness”). Moreover, policies aimed at promoting innovation affect the geographic dimensions of industrial and social inequalities and underpin inequalities between urban and rural (“territorial inclusiveness”).

As a result, it is essential to consider the social, industrial and territorial implications of innovation policies as well. This is especially important if the changes inherent in the innovation process exacerbate income disparities by creating opportunities primarily for high-skilled workers. Inclusive innovation policies – such as implementing well-designed policies to support young firms, simplify registration procedures for start-ups, and improve access to finance and other essential business services – can help mitigate these costs. 

Inequality is closely linked to where people live and work. The economic crisis has widened inequalities across regions within countries. The spatial concentration of income inequality has been increasing everywhere. In advanced economies, income inequality is highest within large cities, with large disparities in income from one area of a city to another. In the developing world, the “urban advantage” remains strong: many more children in rural areas die before the age of 5 due to lack of access to basic health care and poorly educated mothers. Addressing regional disparities is a key element of a strategy to reduce inequality and increase well being.

Evidence shows that the factors that most influence peoples’ well-being are local issues, such as employment, access to health services, pollution and security. So, the policy responses must also be locally targeted. Policies that take better account of regional problems and needs may have a greater impact on improving well-being for the country as a whole by tackling the sources of inequality more directly. But to effectively target policies, governments need the tools to fully understand local conditions and the expectations of their citizens. The publication "How's Life in Your Region", which will be launched in September 2014, will help policy makers to:

• enhancing the relevance of sub-national measures and analysis for addressing policy issues; 
• improving our understanding of the links between policy actions implemented at the local and regional level and outcomes expressed in terms of people’s well-being. 

Inequality is a key driver of individual and country’s well-being and this is why inequality is one of the distinctive features of the OECD well-being measurement framework adopted in the OECD Better Life Initiative.

The report How’s Life? 2017, for instance, includes an in-depth review of well-being inequalities and how to measure them, and shows that gaps in people’s achievements and opportunities extend right across the 11 dimensions of well-being (income and wealth; jobs and earnings; housing; health status; work-life balance; education and skills; social connections; civic engagement and governance; environmental quality; personal security; and subjective well-being). It exposes divisions according to age, gender, education, and wealth, and reveals pockets of inequality in all OECD countries. It also brings to light the many well-being disadvantages that migrants face in adapting to life abroad. Additionally, the report examines governance as seen from the citizen’s perspective, revealing divides between public institutions and the people they serve. The Better Life Index, which is another pillar of the OECD Better Life Initiative, also documents inequalities in selected well-being dimensions. It notably shows gender inequalities in well-being and well-being disparities due to socio-economic gaps.

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Click on the image to access the Better Life Index