Reconciling inequality and growth objectives: can it be done?

Reconciling inequality and growth objectives: can it be done? Isabell Koske OECD, Economics Department 23 January 2012

Background of the study Economic context • Income inequality was high and rising in many OECD countries even before the crisis. • Possible trade-offs and/or complementarities between growth and inequality goals.Context Main objective of the study: • Identifying win-win policies that help foster growth and reduce income inequality, but also those that entail trade-offs between the two objectives.

Inequality in household disposable income varies considerably across countries. Gap between the 10th and the 90th centile and the Gini indexIncome inequality – an overview Household disposable income in the late 2000s 10 0.6 9 0.5 8 7 0.4 6 5 0.3 4 0.2 3 2 0.1 1 0 0.0 SVN KOR ISR FIN SVK AUT CZE HUN ITA JPN USA ISL LUX GBR GRC DNK CHL OECD ESP FRA AUS SWE NOR EST NLD POL CHE PRT CAN DEU TUR NZL IRL MEX BEL Centile ratio (left scale) Gini coefficient (right scale)

Understanding inequality: accounting framework and policy levers Family Self- Individual Taxes & formation employment consumptionIncome inequality – an overview cash and & capital of public transfers composition income goods Household Individual Household Household Household adjusted labour labour market disposable disposable income income income income income Education & Family Tax policies Cash transfers Education & labour market policies (wealth, and tax policies health policies, (child and capital (access & migration & elderly care), income) coverage) gender policies etc. policies etc.

The sources of inequality in household labour income vary across countries. Labour income inequality in the OECDThe distribution of labour income Gini coefficients, late 2000s 0.75 0.70 0.65 0.60 0.55 0.50 0.45 0.40 0.35 0.30 0.25 0.20 SWE NOR POL EST DEU CHE CAN PRT KOR SVN IRL ISR FIN AUT BEL JPN ITA SVK ISL HUN CZE BRA OECD LUX GBR USA FRA AUS GRC DNK ESP CHL NLD Indivdiual labour income (full-time employed) Individual labour income (working-age population) Household labour income

Where in the distribution are individual labour earnings most dispersed? Labour income inequality among full-time employees, 2008The distribution of labour income Centile ratio 50/10 3.0 2.5 2.0 1.5 1.0 0.5 0.0 KOR ISR FIN AUT HUN JPN ITA CZE ISL OECD USA GBR GRC AUS SWE FRA DNK ESP NOR NLD POL DEU PRT CHE CAN IRL NZL BEL Centile ratio 90/50 3.0 2.5 2.0 1.5 1.0 0.5 0.0 SWE NOR POL PRT DEU CHE CAN NZL KOR IRL ISR FIN BEL HUN AUT CZE ITA ISL JPN OECD GBR USA ESP GRC DNK AUS FRA NLD

Workers in the financial sector enjoy an income premium, particularly at the top. Income premium of working in financial intermediation rather than in manufacturingThe distribution of labour income Cross-country average, 2008 or latest available year 60% 50% 40% 30% 20% 10% 0% 10 20 30 40 50 60 70 80 90 Income quantile

Higher union membership tends to be associated with lower wage dispersion. Wage premium of union membershipThe distribution of labour income Cross-country average, 2008 or latest available year 40% 30% 20% 10% 0% -10% 10 20 30 40 50 60 70 80 90 Income quantile

Taxes and transfers reduce market income inequality by about one-fourth. Gini coefficient of market income and disposable income Late 2000s 0.55The tax and transfer system 0.50 0.45 0.40 0.35 0.30 0.25 0.20 0.15 0.10 0.05 0.00 SWE NOR POL EST DEU PRT CHE CAN SVN NZL KOR FIN ISR SVK AUT BEL JPN ISL ITA USA LUX CZE OECD ESP GBR DNK FRA CHL AUS NLD Market income Disposable income

In most, but not all countries the redistributive impact of transfers is higher than that of taxes The redistributive impact of taxes and transfers Point reduction in concentration coefficients, late 2000s 0.18The tax and transfer system 0.16 0.14 0.12 0.10 0.08 0.06 0.04 0.02 0.00 SVN FIN KOR ISR AUT JPN ITA SVK ISL CZE LUX OECD USA GBR FRA CHL DNK AUS ESP SWE NOR POL EST NLD CHE DEU CAN PRT NZL IRL BEL Household taxes Public cash transfers

The size and composition of public cash transfers vary across OECD countries. Public cash transfers to households Percent of GDP, 2007 20The tax and transfer system 18 16 14 12 10 8 6 4 2 0 OECD MEX ITA DEU CAN DNK BEL CHL SVK AUS AUS IRL HUN GBR SVN USA GRC NOR CZE POL LUX ISL ISR ESP FRA CHE FIN JPN EST NZL PRT NLD KOR TUR SWE Old age Incapacity Family Unemployment Other social policy areas

The redistributive impact of the tax system is a function of its size and progressivity. Size and composition of total tax revenues 2009 % of GDPThe tax and transfer system 60 50 40 30 20 10 0 SWE NOR EST POL PRT CAN CHE DEU TUR SVN NZL IRL ISR FIN KOR SVK ITA HUN BEL AUT JPN USA CZE ISL OECD LUX GBR GRC ESP AUS FRA DNK NLD Personal income taxes Corporate income taxes SSCs and payroll taxes Taxes on goods and services Other Progressivity of household taxes (right axis)

Measures to improve human capital are clear win-win strategies. Labour Employment Earnings GDP per A rise in: income rate equality capita equality Equity in education ? + + + Upper-secondary and tertiaryImpact of policies ? + + + graduation rates Initiatives to foster the + + + + integration of immigrants Initiatives to raise female labour + + + + force participation Initiatives to combat + + + + discrimination

In the area of labour and product markets, the equality effects depend on the precise measure. Labour Employment Earnings GDP per A rise in: income rate equality capita equality Minimum wage (relative to 0/- + ? 0/- median wage)Impact of policies Unionization ? + + ? Legal extensions of collective - ? - - wage agreements The gap between protection on - - - - regular vs. temporary work Product market regulation - 0/+ ? -

Many tax policies imply trade-offs with respect to the growth and distribution objectives. Disposable GDP per Revenue-neutral tax changes: income capita equality Change tax mix from income to - + consumption tax Change tax mix from income to realImpact of policies - + estate tax Change tax mix from income to wealth ? + and inheritance tax Increasing top PIT rates and tax free + ? allowances Cutting tax expenditures and marginal + + rates

Contact information and underlying documents. Contact person • Isabell Koske (Isabell.Koske@oecd.org) Webpage • www.oecd.org/economy/goingforgrowth/inequality.Further information Going for Growth 2012 • Reducing income inequality while boosting economic growth: can it be done?, Chapter 5 OECD Economics Department Policy Notes Series • Policy Note No. 8: Inequality in labour income – What are its drivers and how can it be reduced? • Policy Note No. 9: Income inequality and growth – The role of taxes and transfers

OECD Economics Department Working Paper Series Working Paper Series on “Less income inequality and more growth – Are they compatible? ” • WP 924: Part 1. Mapping income inequality across the OECD • WP 925: Part 2. The distribution of labour income • WP 926: Part 3. Income redistribution via taxes and transfers acrossFurther information OECD countries • WP 927: Part 4. Top incomes • WP 928: Part 5. Poverty in OECD countries • WP 929: Part 6. The distribution of wealth • WP 930: Part 7. The drivers of labour earnings inequality – An analysis based on conditional and unconditional quantile regressions • WP 931: Part 8. The drivers of labour income inequality – A review of the recent literature

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Reconciling inequality and growth objectives: can it be done?

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