Are you in the 1%?

It's good news: I'm in the 1%!
It’s good news: I’m in the 1%!

Oliver Denk, OECD Economics Department

The 1% are back in the news following last week’s Oxfam report claiming that the world’s 62 richest billionaires own as much wealth as the poorest 3.6 billion people on the planet combined. But what about labour income rather than wealth: Who are the 1% when earnings are counted, and not shares, property, and so on? We have a good idea of how much they earn thanks to the administrative records studied by researchers like Thomas Piketty. But these studies don’t actually tell us much about the personal characteristics of the top earners, such as their education, occupation, or the industry they work in.

That’s where my new research comes in, which for the first time puts hard numbers on who the top earners are across 18 European countries. The data source I use is the Eurostat Structure of Earnings Survey for 2010. It is the largest harmonised dataset on employees’ earnings across Europe, with a total of 10 million observations.

Thanks to these vast data, I was able to compare the top 1% earners with the bottom 99%, focusing on the employee’s age, gender, and highest attained level of education, in addition to the number of years the employee has been with the firm, industry, and occupation. You can find the details of the sample, analysis and results in OECD Economics Department Working Paper N°1274.

So, what do the data show? I’m sure you’ll be as unsurprised as me to learn that, whatever the country, if you’re a middle-aged man working as a financier, doctor, or engineer you’ve a better chance than most of being among the top 1% of earners. The typical person in the top 1% is male, in his 40s or 50s, has a tertiary education degree, works in finance or manufacturing, and is a chief executive, manager or professional.

Digging deeper shows that the top 1% have an average age of 47, hence are five years older than the average worker in the bottom 99%. Around 80-85% in the top 1% are men versus 50-55% in the bottom 99%, and the share of men among the top 1% is actually above 90% in Germany and Luxembourg. Likewise, 80-85% among the top 1% completed tertiary education, compared with 30-35% among the bottom 99%.

There are however important differences between countries and regions. And these appear to be connected to political and economic institutions. Thus, some of the policies your governments are choosing may matter for whether you are in the 1%. I’ll highlight a few of these differences.

Top earners are disproportionately younger, often in their 30s, in Eastern Europe (the Czech Republic, Estonia, Hungary, Poland and the Slovak Republic). At first glance, you might think this is because the workforce is younger in these countries than elsewhere, but the analysis doesn’t support this explanation. The much younger age of top earners in Eastern Europe is probably related to the economic transformation of these countries after the fall of the Iron Curtain. Workers already in the labour market during the 1980s, the last years of communism in Eastern Europe, have less chance than in Western Europe of having moved up to the top 25 years later.

In countries where overall female employment is higher, more of the top 1% are women. The paper does not attempt to establish that it is higher female employment, rather than a related factor, that “causes” more women to be at the top. Nevertheless, one way to interpret this finding is that public policies to broaden female participation in the labour market might also have the benefit of facilitating high-paying careers for women.

Length of career with a particular employer shows contrasting results. One in five top 1% earners has worked for the same employer for more than 20 years. On the other hand, almost one-third of the 1% are new recruits. This pattern is quite different though in Southern Europe (Greece, Italy, Portugal and Spain) where top earners tend to have stayed much longer with their current firm than other workers. The difference could be a sign of stronger family ties or lower labour market flexibility at the top in these economies.

Health professionals are a large group of top earners in several countries, and how much they are paid appears to be linked with life expectancy for the population as a whole. The data suggest: wealthy doctors=healthy people, or that life expectancy is higher the larger the share of the top 1% who are health professionals. Spain and Italy, for example, have both the best-paid doctors, relative to other occupations, and the highest life expectancy, though the analysis does not preclude that better weather, nutrition or other factors might be at work.

Finally, industry structure can affect how concentrated labour income is. Comparing countries with one another shows that the more of the 1% who work in finance, the higher is the share in total earnings that goes to the top 1%, and the smaller is the share that goes to the bottom 99%. That’s one indication that more finance may increase inequality. In earlier work with Boris Cournède and Peter Hoeller, I showed that financial expansion more generally, of bank credit or stock markets, is connected with a widening of the income distribution. Now we’ve come full circle, as the Oxfam report actually draws on our results.

What next? The analysis suggests several questions to be explored in future work, for example trying to establish causality for some of the correlations. This kind of data could also serve as the basis of a study of what’s known as the “rent extraction view”, according to which sectors that are more strongly regulated relative to other sectors and other countries attract more top 1% incomes. And of course it would be interesting to extend the geographical scope if suitable data became available for other countries.

Useful links

Income Inequality: The Gap between Rich and Poor, Brian Keeley, OECD Insights, 2015

OECD Economics Department

OECD work on inequality

OECD data on income inequality

OECD Economics Department Working Papers

Rich or poor? We’re not sure…

launch-event
COPE launch event

Back in May, we asked you a simple question – are you rich or poor? For once, this question wasn’t rhetorical. Thanks to the OECD’s Compare Your Income tool, you could actually check for yourself where you stood on the income scale – rolling around in money or struggling to make ends meet.

Since the launch of Compare Your Income, more than a million people worldwide have completed the survey. And the answer we’ve all given to that question – are you rich or poor? – is absolutely clear: We’ve no idea.

In other words, if we’re rich, we think we’re poorer than we are; if we’re poor, we think we’re richer.

It’s true that these are still early findings and cover just three countries – France, Mexico and the United States. But, they do suggest that many of us have only a dim understanding of whether we’re doing better or worse than our neighbours. In France, only 1 in 6 people correctly guessed if they were high, medium or low earners; in Mexico it was 1 in 8; and in the United States it was just 1 in 10.

The people who were most likely to guess their position on the income scale correctly were middle-earners. By contrast, the people who most often got it wrong were the very highest and lowest earners. Among low earners, most underestimated just how far behind they were compared to everyone else. But the well-off, too, were almost as likely to get it wrong, often dramatically so. More than half of top earners in the U.S. and Mexico actually thought they belonged down in the bottom half of the income distribution.

 

Presumably, these top earners didn’t comprehend just how well they were doing compared with everyone else. If that’s the case, it seems to echo other research suggesting that a high income may not bring much of a sense of economic security. For example, a few years ago Boston College managed the rare feat of getting some millionaires and a couple of billionaires to talk frankly about the joys and dilemmas of being rich. Amid the findings, perhaps the most surprising aspect of being well off was that people still seemed to worry a lot about money. As Graeme Wood wrote in The Atlantic, despite sitting on assets worth tens of millions of dollars, most said “they would require on average one-quarter more wealth than they currently possess”. One heir to a vast fortune admitted that “he wouldn’t feel financially secure until he had $1 billion in the bank”.

Income perceptions aren’t the only issue under examination in the Compare Your Income survey. Among a number of issues, it also looks at people’s attitudes to how the economic pie is sliced up – what percentage of national income goes to top earners and how much should they earn?

Here, again, people’s understanding of the facts seemed to be at odds with reality. For example, French respondents believed that about 60% of the country’s income goes to the top 10% of earners. The actual figure is rather lower – around 25%. And when respondents were asked how large a share of income should go to top earners, they actually opted for a figure in excess of the reality – about 30%.

Speculating again, it’s possible here that respondents are confusing income and wealth. In extremely basic terms, income is the money you receive at the end of every week or month in your paycheque and wealth is the money that’s – hopefully – building up over time in your bank account (as well as other assets). Wealth is, indeed, spread out much more unequally than income: In OECD countries, the top 10% of wealth owners hold about half of all household income, according to In It Together, a recent OECD report.

Think you can do better than the million-plus people who’ve already taken part in the Compare Your Income survey? There’s still time to have a go – just follow the link below.

Useful links

The OECD today launches its new Centre for Opportunity in Equality to take forward the organisation’s work on inclusive growth and inequality.

Compare Your Income

Are you rich or poor?

In it togetherIn a world where wealth reports and rich lists regularly occupy the headlines, most of us have surely asked ourselves where we sit on the spectrum that starts with struggling to get by and ends with Bill Gate’s estimated fortune of $79 billion.

If you think you already know the answer, think again. Research indicates that many of us have only a vague idea of how our income compares to that of our neighbours. For example, in France in 2011 about three out of five poor people thought they were better off than they were. Conversely, about four out of five rich people didn’t appreciate just how well off they were.

Similarly, many of us don’t have a strong sense of the income gap in our own countries. Americans, for example, typically think the gap between rich and poor is smaller than it is. On the other hand, people in a number of European countries, such as Hungary and Slovenia, often think the gap is wider than it is.

If these questions have been on your mind, we have some good news. From today, a new OECD research tool lets you get some hard numbers on whether you’re rich or poor. Simply type in where you live, your age and your income, and Compare Your Income will tell you where you stand on the income scale in your country – up there with Mr. Gates or … well, down here with the rest of us.

Share of the pie

But the tool goes further that. It also lets you check if your sense of where you stand in relation to everyone else is accurate – you may be pleasantly surprised or sadly disappointed. More broadly, it also explores your understanding of how income is distributed in the country where you live.

Over the next few years, the anonymous and confidential responses that users provide to Compare Your Income will be used by the OECD to develop a clearer picture of people’s perception of wealth, poverty and income inequality in OECD countries. That, in turn, will feed into future analysis of income inequality – an issue that has “moved to the top of the policy agenda in many countries,” according to In It Together, a new OECD report that’s also released today

Given current trends, income inequality is likely to remain a top policy item for some time to come. As In It Together notes, the gap between rich and poor is now at its highest level in 30 years in most countries. Today, the top 10% earns 9.6 times the income of the poorest 10%; back in the 1980s, the ratio stood at just 7 to 1.

But there’s perhaps a sense in this latest OECD report that the focus of the debate is shifting – from top earners, the so-called 1%, to a large swathe of low earners, or what might be called the bottom 40%. In recent decades, these low earners have gained little from economic growth in many OECD countries and, in some cases, have seen real falls in their incomes.

As we discussed here on the blog last year, OECD research indicates that the declining economic power of this bottom 40% of low earners is bad not just for them but also for the overall economy. The research shows that when the gap between rich and poor grows, lower earners invest less in education and skills. By contrast, there is little or no change in how much middle and high-income families invest. The consequence of this underinvestment is a smaller talent pool for the economy, which, in turn, slows growth.

The new report adds further detail to this research and also looks at some of the factors that are weakening the situation of low earners, including growing concentration of wealth – as opposed to income – and the decline of “traditional” employment. We’ll return to some of these subjects soon.

Useful links

In It Together: Why Less Inequality Benefits All is the third in a series of OECD reports on income inequality. The previous titles are Growing Unequal? (2008) and Divided We Stand (2011).

OECD work on income inequality and poverty

OECD Income Distribution Database

We’re all free to be poor

That's one way to help the poor
That’s one way to help the poor

According to the CIA World Factbook, political parties are prohibited in Bahrain, but don’t despair, freedom lovers, the “constitutional monarchy” formerly known as an emirate is the 13th freest country in the world according to the 2014 Index of Economic Freedom. Economic freedom? According to the Heritage Foundation, co-publisher of the Index with the Wall Street Journal, that’s “… the fundamental right of every human to control his or her own labor and property”, plus aspects such as “the ability of individuals and businesses to enforce contracts”. The CIA, always looking for something to moan about, claims that “Bahrain is a destination country for men and women subjected to forced labor and sex trafficking; […] domestic workers are particularly vulnerable to forced labor and sexual exploitation because they are not protected under labor laws; […] the government has made few discernible efforts to investigate, prosecute, and convict trafficking offenses; […] most victims have not filed lawsuits against employers because of a distrust of the legal system or a fear of reprisals.”

If it’s like that in one of the freest countries in the world, you can imagine what it’s like in hell-holes such as Norway, 20 places down the list from Bahrain. And what about those poor souls living in Italy, the least free OECD country? Italy ranks 70 places lower than Bahrain, just behind Kyrgyzstan (where’s the CIA’s continuing concerns include: “the trajectory of democratization, endemic corruption, poor interethnic relations, and terrorism.”).

Still, the Index’s “two decades of advancement in economic freedom, prosperity, and opportunity” haven’t been wasted on everybody. Oxfam says that 210 people have been lifted out of poverty in the past year, helping bring the world’s total number of billionaires to 1426, with a combined net worth of $5.4 trillion. And as you’d expect, some billionaires have more billions than others: the world’s 85 richest individuals own as much wealth as the poorest 3 billion people.

That’s worrying the World Economic Forum, finishing in Davos today. The WEF’s annual Global Risks Report ranks “severe income disparity” at number 4 in a list of ten global risks of highest concern. (The top three are fiscal crises, unemployment, and water crises.)  The WEF doesn’t go into detail, but it does point out that beyond the immediate impacts, income inequality interacts with and reinforces other socioeconomic and political trends.

Oxfam provides many concrete illustrations of what that means. For instance, their poll of low-wage earners in the US showed that two-thirds of them believe that Congress passes laws that predominately benefit the wealthy. And that was before last week’s news that most members of Congress are now millionaires (and to think, some people accuse the OECD of being a rich man’s club!). In another Oxfam survey in Spain, Brazil, India, South Africa, the UK and the US, a majority of people (8 out of 10 in Spain) believe that laws are skewed in favour of the rich. Similarly, the majority agreed that “The rich have too much influence over where this country is headed”.

You would have to be particularly naïve to imagine that the rich and powerful don’t use their wealth and power to influence governments, whatever the consequences for the rest of us. An IMF working paper  concluded that “prevention of future crises might require weakening political influence of the financial industry and closer monitoring of lobbying activities to understand the incentives better”.  The financial industry spent over $1 billion lobbying against regulation in the US after the crisis, but, please don’t tell anybody. In an OECD survey, only around 5% of lobbyists thought that “overall lobbyist expenditure” should be disclosed.

A crisis can have an immediate, long-lasting impact in terms of people losing their jobs and houses, but income inequality can cause less spectacular, but no less damaging, losses too. Oxfam quote an OECD report on Mexican telecoms on the consequences for the country of the monopoly position of América Móvil, owned by the world’s richest man, Carlos Slim. “Mexico, with the lowest GDP per capita in the OECD, a high inequality of income distribution, and a relatively high rural population, needs the socio-economic boost provided by greater access to more   services, in particular high speed broadband. The welfare loss attributed to the dysfunctional Mexican telecommunication sector is estimated at USD 129.2 billion (2005-2009) or 1.8% GDP per annum.”

What can be done about all this? The OECD’s answer is “inclusive growth”. Have a look at last year’s OECD Forum to find out more about what that is. Or consider this to find out what it isn’t: the richest 1% increased their share of income over 1980-2012 in 24 out of 26 countries for which data are available. Calculations using figures from the Paris School of Economics’ World Top Incomes database suggest that if income shares had stayed the same over this period, the 99% would have an extra $6000 each in the USA today.

Useful links

OECD work on inclusive growth

OECD work on income distribution and poverty in OECD and non-OECD countries

Growing Unequal? Income Distribution and Poverty in OECD Countries

Inequality, the crash and the crisis. Part 3: The Limit to Inequality

Click to see the book

Today we publish the last of three articles on inequality and the crisis by Stewart Lansley, visiting fellow at The Townsend Centre for International Poverty Research, Bristol University and the author of The Cost of Inequality: Why Economic Equality is Essential for Recovery, Gibson Square, 2012. He was one of the speakers at the 2012 OECD Forum session: How Is Inequality Holding Us Back?

The key lessons of the 2008 Crash are now becoming clear. For the last thirty years, some of the world’s most important economies have been applying a faulty theory on the way the economy works. Demand in most large economies is wage-led not profit-led. That is, a lower wage share leads to lower growth. This is also true in aggregate of the global economy.

The evidence from the last 100 years is that more equal societies soften, and more polarized ones intensify, the gyrations of the business cycle. Inequality is not just an issue about fairness and proportionality, it is integral to economic success. A capitalist model that allows the richest members of society to accumulate a larger and larger share of the cake merely brings a lethal mix of demand deflation, asset appreciation and a long squeeze on the productive economy that will end in economic turmoil.

Yet that model has survived the second deepest recession of the last 100 years largely intact. In contrast, the economic crisis of the 1930s was to give way to a very different model of political economy, one that eroded the extremes of wealth that had helped create the crisis.

Today, it is largely business as usual. The world’s rich have been the main winners from the global recession. In the United States, profits and dividends have risen since 2008 while real wages have fallen. According to the American economist, Emmanuel Saez, average real family income declined by a remarkable 17.4 per cent between 2007 and 2009.

Profits and dividends are up largely because wages are down. As JP Morgan Chase chief investment officer, Michael Cembalest, has documented. “U.S. labor compensation is now at a 50-year low relative to both company sales and U.S. GDP.”

A key consequence of this trend is that all income growth in the US in 2010 went to the wealthiest 10 percent of households, and 93 percent to the wealthiest one per cent.

In the UK, there has been a similar, if less extreme pattern. Real wages have fallen on average by seven per cent in the last two years and are set to continue to fall. Indeed, the independent Office for Budget Responsibility (the OBR ) has forecast that the wage share will have fallen by a further four percentage points between 2010 and 2006. In contrast, incomes at the top have continued to rise through the slump. In 2007, the ratio of the median earnings of FTSE 100 top executives to median wages stood at 92:1. By 2011, it had risen to 102:1. Not only did executive pay greatly outstrip average earnings growth up to 2007, apart from a slight blip in 2009, it has continued to do so.

There has been much talk about the need to tackle growing inequality, but little real action. Ending the present crisis and building a sustainable global economy requires a much more fundamental leap that accepts that there is a limit to the level of inequality – one that is still being breached in a majority of nations – that is consistent with stability.

The successful management of economies depends especially on securing a more equal distribution of market incomes, before the application of taxes and benefits. Tackling the unequal “pre-distribution” of incomes means elected governments taking more responsibility for both the distribution of factor shares and of relative levels of pay.

It is a role that most, if not all, governments have been and remain reluctant to play. For most national governments – and global institutions from the IMF to the OECD – reducing inequality has not been a central economic goal alongside say, controlling inflation, or tackling fiscal deficits.

In the US, the UK and most rich nations, the economic role and impact of inequality has been at best a side-issue in economic decision-making. Too many governments have, by default, allowed the relationship between wages and output to become dangerously imbalanced. They have permitted remuneration practices to emerge that have distorted incentives and sanctioned business activity geared more closely to wealth diversion than wealth creation.

Translating talk into action requires governments to set clear targets for a number of key economic relationships. These should include the balance between wages and profits, the pay gap between top and bottom and the degree of income concentration. In a majority of countries, the wage share is too low and heading lower; the pay gap, already at historic highs, is heading higher while income concentrations are above the limit consistent with stability.

Meeting these targets means ditching many of the failed economic shibboleths – that inequality leads to faster growth, that allowing the rich to keep more of their own money boosts growth and tax revenue, that a larger pay gap reduces unemployment – of the last thirty years. It will require much tougher policy measures aimed at keeping economic elites in check. National governments need to develop a new contract with labour that raises the wage floor, bolsters the middle and lowers the ceiling. This means the taming of excessive corporate power and a rebalancing of bargaining power in favour of the workforce. It means moving towards more progressive tax regimes with much tougher global action on tax havens.

None of this will be easy. Despite the accumulated evidence that fairer societies and economic success go hand in hand, and the mounting pressure for change, the political and economic consensus remains rooted in the past. Radical change will be heavily opposed by those with most to lose. Yet a model of capitalism that fails to share the proceeds of growth more proportionately is not sustainable.

Useful links

Divided We Stand: Why Inequality Keeps Rising

Growing Unequal? Income Distribution and Poverty in OECD Countries

Unsuitable for wives and servants?

Only one of us still goin' strong, Bobby Baby

Apart from the OECD and the Bobby Darin Dream Car, this year marks two other major anniversaries, both linked to books: the publication of the King James Bible in 1611 and DH Lawrence’s  Lady Chatterley in 1961.

By the time you get to the end of this article, I hope to have thought of an OECD link for the KJB, but for the torrid tale of her ladyship and the hired help, there are a couple of possibilities, the first and most obvious being the Smoot-Hawley Tariff Act.

In 1930, this raised import duties on thousands of items coming into the US and is now widely condemned as having made the Great Depression worse, since America’s trading partners retaliated. President Hoover said that the Smoot-Hawley Act was “vicious, extortionate, and obnoxious”.  Today of course, what you’d be more likely to get is something like: “While we share the concerns of Senators Smoot and Hawley, we feel more discussion is required on certain aspects of their proposed solution”.

That said, OECD Secretary-General Angel Gurría was less mealy-mouthed the other day at the OECD Global Forum on Trade  when he talked about the “phantom of protectionism again showing its ugly face”. Smoot himself could actually be quite entertainingly odious. He opposed an amendment to his Act that would have stopped US customs from censoring “obscene” books using Lady Chatterley as an example, explaining that it had been written by a “man with a diseased mind and a soul so black that he would obscure even the darkness of hell”.

Lawrence’s book was published in 1928 in Italy, but the first unexpurgated version was not openly published in the UK until 1960, and in November it was prosecuted under the Obscene Publications Act (as it would be in similar trials in many other countries). The defence was based on the literary merits of the work, but the turning point for many people was when  chief prosecutor Mervyn Griffith-Jones asked the jury if “they would let their wife or servants read” this kind of book. Apparently they would, and the book was published again without a problem early in 1961. 

Griffith-Jones’ question was outrageous even by the standards of 50 years ago, so has much changed since? Attitudes to sex and sexism have certainly evolved, and women have improved their lives in some respects. According to the World Economic Forum’s Global Gender Gap Report 2010, the 134 countries covered, representing over 90% of the world’s population, have closed almost 96% of the gap regarding health between women and men and almost 93% of the gap regarding education. However, only 59% of the economic gap has been closed and the figure for political rights and representation is even worse, at only 18%. A report on the OECD Gender Initiative also talks about “persistent inequalities”.

How about your staff? For much of the 19th and part of the 20th century, domestic service was the main job in the urban areas of advanced economies. Manufacturing employment rose and fell, and now services are once again the main sector in OECD countries and elsewhere. The gap between masters and servants (or their modern equivalents) hasn’t closed much though, and in fact it’s been widening.

Movements like Occupy Wall Street in the US or the Indignados in Spain are one manifestation of the sentiment that even when there is progress, the rich get more than their fair share. To return to Gurría’s  speech to the trade conference, he pointed out that thanks to NAFTA, his home country Mexico has annual exports “close to 300 billion dollars a year, becoming one of the top exporters in the world. But the benefits of NAFTA need to be better distributed.” According to this OECD report on the two decades before the crisis, “In a large majority of OECD countries, household incomes of the top 10% grew faster than those of the poorest 10%, leading to widening income inequality.”

So, it’s still dream cars for some and increasingly overcrowded buses for the rest.

How about that link between the King James Bible and the OECD I promised you? Well, the best I can do is that it the King James translation was actually done by a (seriously underfunded) committee and when we were preparing our booklet on the OECD 50th Anniversary, one of the invited contributions started: ”One of the most exciting things about the OECD is the impressive range of its committees”. I think some thrill-averse subeditor deleted that bit though, so if you can think of anything better, let us know.

Useful links

OECD work on trade

OECD work on gender

WikiGender

OECD work on income distribution and poverty

High times for the jet-set

It's the rich what gets the pleasure...

You can’t avoid inequality these days. Lately, it’s made the covers of The Atlantic and The Economist, and rarely a week seems to go by without some new report examining its impact. Even those on the sunny side of the rich-poor gap seem concerned: The “Davos Crowd” recently cited “economic disparity” as one of the two biggest risks facing the global economy.

There isn’t much debate over whether or not income inequality is rising within countries. Almost everyone accepts it is. As these numbers show, it’s grown in all but a handful of OECD countries since the 1980s, although – as the OECD’s Growing Unequal? report points out – probably by not as much as most people think.

But inequality hasn’t just risen in the developed OECD area. While emerging economies like India and China are enjoying huge reductions in absolute poverty they are also seeing a widening gap between rich and poor. Even China’s media uses words like “unreasonable” to describe these disparities. Rising inequality is also being linked to the turmoil in North Africa and the Middle East. Mario Pezzini, director of OECD’s Development Centre, noted recently that the uprisings in Egypt and Tunisia “are some of the manifestations that inequality matters in economic and political terms.”

There also isn’t much debate over the factors fuelling inequality. One is globalisation, which “expands the market for ultra-talented individuals but competes away the income of ordinary employees”, says economist Ken Rogoff. Another is the shift to the so-called knowledge economy – “people who know how to exploit the internet gain,” says Growing Unequal?, “and those who don’t, lose.”

The workers who “lose” are often perceived as being fairly far down the corporate chain – the receptionist who’s replaced by an automatic answering machine, for example. But that’s no longer the case, says Paul Krugman:  These days, he says, even well-educated white-collar workers are being replaced by technology. Example? Lawyers: Specialised software can now perform pre-trial document searches that until recently were carried out by “a platoon of lawyers and paralegals who worked for months at high hourly rates”. Krugman argues that what we’re seeing is not just a widening gap between rich and poor, but a hollowing out of the middle class: “Both high-wage and low-wage employment have grown rapidly, but medium-wage jobs – the kinds of jobs we count on to support a strong middle class – have lagged behind.” 

If that characterisation is accurate, the identity of the “winners” seems clear: Chrystia Freeland refers to them as “a new super-elite … hardworking, highly educated, jet-setting meritocrats who feel they are the deserving winners of a tough, worldwide economic competition”.

What about everyone else? Is this winner-takes-(almost)-all society benefiting the non-jet-setters? There’s increasing interest in investigating that question. For example, one of the most-discussed books of recent years was The Spirit Level, which described unequal societies as “dysfunctional”; critics, however, said the book’s analysis was “heavily flawed”.  

The rise is inequality is being examined by others, too. A recent paper from economists at the IMF  states that rising inequality helped  cause the financial crisis of 2008, mainly because it weakened the “bargaining power” of those at the bottom of the economic pile. Other economists have examined the impact of the “trickle down” effect – the extent to which rising wealth at the top supposedly filters down to the less well off. A paper co-written by OECD colleague Dan Andrews (who carried out the research in a private capacity) concludes that the trickle-down benefits for lower earners have been fairly weak, and that any benefits have taken a long time to materialise.  

Still, love it or loathe it, inequality will never vanish entirely, and many believe we would all suffer if it did: The prospect of getting a bit richer is an incentive for entrepreneurs and risk-takers and – as Gary Becker argues  – for people to invest in education and skills (their human capital).

So, the question for societies is more likely to be this: How much inequality are we prepared to live with? Of course, if we decide we’d like a bit less, that raises a second question. As The Economist recently framed it, do we achieve it by pushing up people at the bottom and the middle of the income distribution or by pulling down those at the top? 

Useful links

 OECD Development Centre – Social Cohesion Seminars  

Growing Unequal?  – Income distribution and poverty in OECD countries

OECD Insights: Human Capital