Why it’s getting harder to be really rich


Is wealth a matter of luck?

Seventy million pounds – or about $114 million: That’s how much you now need to get on to The Sunday Times “rich list” (subscribers only) in the UK. A pretty steep entry barrier and, perhaps surprisingly, it’s even higher than it was before the crisis: Just three years ago, a mere £55 million would have won you a place among the UK’s wealthiest.    

That’s further evidence that the gap between the incomes of the richest and the poorest is widening. But as a recent OECD paper demonstrates, it’s not happening just in the UK. Income inequality has risen in all but a handful of OECD countries, says the paper, which offers preliminary findings ahead of a fuller report later this year. On average, the richest 10% of people are about nine times better off than the poorest 10% in OECD countries, a ratio of 9 to 1. The gap is lower in Scandinavian countries – about 5 to 1 – but higher elsewhere: 14 to 1 in Israel, Turkey and United States and 27 to 1 in Mexico and Chile.

“With very few exceptions (France, Japan and Spain), wages of the 10% best-paid workers have risen relative to those of the 10% least-paid workers,” says the paper, and “top earners saw their incomes rising particularly sharply”.

As we noted recently on the blog, the trend is for the gap to grow, and “even in highly egalitarian places like Scandinavia”, as The Economist points out. One way to understand this is through the Gini coefficient a “measure of income inequality that ranges from zero, when everybody earns the same amount, to one, when all income goes to only one person”, as The Wall Street Journal explains. By that measure, income inequality in OECD countries has risen from 0.28 in the mid-1980s to 0.31 in the mid-2000s – an increase of 10%.

The rise is often blamed principally on a mix of globalization, which has led to a decline in manufacturing jobs in developed countries, and the emergence of the knowledge economy, which rewards people with higher levels of education. The OECD paper acknowledges that technological progress and globalisation have had an impact, but that their role has perhaps been overstated. It’s true that increased trade – a characteristic of globalization – has put pressure on the wages of lower-paid workers. But some of these downsides have probably been offset by rising capital flows – another feature of globalization – most notably a big increase in foreign investment.

Instead, the paper suggests the role of other factors may have been overlooked, notably the changing nature of taxes and benefits – in effect, the money governments collect in taxes and social security contributions from workers and then redistribute, directly and indirectly, as benefits to people in need. This system of redistribution reduces income inequality by a quarter in OECD countries, and by even more in some countries. But, the paper suggests, its impact has weakened over the past 10 to 15 years.   

Regulatory reforms – or changes to the rules covering everything from product monopolies to work contracts – have also played a role. On the one hand, these have brought benefits by bringing more people into labour force. On the other hand, says the paper, they “have also contributed to widening wage disparities, as more low-paid people were brought into employment and the high-skilled reaped more benefits from a more dynamic economy.”

And there’s been a change in who we marry: “Over the years people have become more and more likely to marry mates who have similar incomes,” says The New York Times . By contrast,  when richer and poorer people wed, it tends to spread out the benefits of higher incomes more widely in society.

So what can be done? OECD Secretary-General Angel Gurría clearly believes action is needed: “Halting the scary outlook of increasing inequality is more urgent than ever,” he said at a recent OECD policy forum  devoted to the issue.

Based on its examination of the causes of rising inequality, the OECD paper suggests taxes and benefits may need to be looked at again, especially in light of the fact that “the share of overall tax burdens borne by high-income groups has declined over recent years”. Action is also needed to ensure that people who aren’t currently working can find jobs, but “this requires not only new jobs, but jobs that enable people to avoid and escape poverty,” the paper says. And, it concludes, there needs to be a stronger focus on better training and education for low-skilled workers.

Useful links

OECD work on inequality www.oecd.org/els/social/inequality

Annual Bank Conference on Development Economics (ABCDE conference) 30 May 1 June at the OECD

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

Women: the future of our economies?

8 March is the centenary of International Women’s Day. This year, we mark the occasion with a series of blog posts about initiatives to strengthen gender equality worldwide. In this post, OECD Secretary-General Angel Gurría looks at women’s role in the economy.

On the 100th Anniversary of the International Women’s Day, have we achieved equal opportunity, even in the developed countries? No, women are not equal on the labour market, in entrepreneuship or in politics.

Women spend twice as much time as men in unpaid caring activities. Women are still under-represented in key education fields such as science, technology, engineering, and mathematics. Women are less likely to work for pay, tend to work less hours, have lower hourly wages, are concentrated in less well-paid sectors, etc. They are also less likely to reach decision-making positions, in either public or private sectors. In politics, women still hold only 20% of seats in Parliaments; only a very few country show parity in their governments; and only 15 women are Head of states or governments. (more…)

Women and money

8 March is the centenary of International Women’s Day. This year, we mark the occasion with a series of blog posts about initiatives to strengthen gender equality worldwide. In this post, Flore-Anne Messy of the OECD’s Directorate for Financial and Enterprise Affairs  discusses women and financial education.

Elderly women in OECD countries are 30% more likely than men to be poor. Women receive $75,000 dollars less pension on average over their lifetime than men, despite living 5.6 years longer. But whatever their age, poverty rates for women in OECD countries are higher than for men.

It’s not just that women generally earn less than men. Where money is concerned, there are also big gender differences in knowledge and skills. Research in the US and other countries shows that women are less likely than men to give the correct answer to financial knowledge questions. They are also more likely to lack confidence in their own skills, be cautious investors, and to have insufficient funds for retirement. This cautious approach does have advantages but can severely impact on retirement funds. Studies in the US suggest that women’s retirement pots are, on average, a third smaller than men’s. (more…)

It’s just a human

8 March is the centenary of International Women’s Day. This year, we mark the occasion with a series of blog posts about initiatives to strengthen gender equality worldwide.

On March 26 1911, the New York Times described how 141 workers, mainly girls, died in a fire in the Triangle Shirt Waist factory. Almost a century later, it described a similar tragedy in Bangladesh.

“The factory had only one main exit, and workers had to scramble through a lone narrow stairway to escape, while others jumped from windows”, said fire official Rashidul Islam. He could have been talking about New York, where one of the journalists described the distress of a veteran police officer trying to identify the dead bodies. The reporter asked him if one of the corpses was a man or a woman, but all he could say was that it was just a human. (more…)

Do blondes have more fun? An OECD expert replies

Calibrating the OECD "Society at a Glance" Funometer (TM)

Today’s post is contributed by Maxime Ladaique from the OECD directorate of Employment, Labour and Social Affairs.

I know how hard it is to wait for World Statistics Day on 20 October (20102010, get it?), so today I’m going to tell you about some particularly interesting statistics: in which OECD country people are most satisfied with their life, and why these people are happier.

And if you don’t mind, I’m going to make you work a little bit. I would like you to think of a number from 0 to 10, but not a random number: a number measuring your current level of life satisfaction.

Zero means you’ve got a bad case of the blues. In fact, if you chose 0, I don’t think you should be reading this blog. Maybe you should be with your family, or consulting a doctor.

10 means you couldn’t feel better. I’m not sure there will be any “10s”, unless you are reading us from a beach or a yacht in the Caribbean.

Anyway, this is how US poll company Gallup collects data on levels of life satisfaction in 150 countries around the world – and we use these data at the OECD.

OK – You all have your number ready?

Do you think you feel happier or less happy than other people?

Well, on average across OECD countries, people report a level of life satisfaction of 6.7. People from the UK, Canada, New Zealand or from France report – on average – slightly higher levels than the OECD average, between 7 and 7.5.

Countries with the lowest levels of life satisfaction are some eastern European and Mediterranean countries – Hungary, Slovak Republic and Turkey – at around 5.

And countries with the highest levels are the Nordics. Yes, you know: those blonds!  First Denmark, then Finland – at almost 8!

So what’s their secret? How do the Nordics manage to be satisfied? Is it the cold weather? Is it the pickled herrings? Or do blondes really have more fun?

Not really. I’ll tell you two main reasons.

First, these countries perform quite well economically. They are among the richer OECD countries, and people in richer countries report higher levels of life satisfaction.

But, you ask, what about the United States, one of richest countries: why are Americans not reporting higher levels of life satisfaction on average?

This is because although it’s rich, there is a lot of inequality in the levels of life satisfaction. There are many people reporting high levels of life satisfaction and many reporting low levels.  People tend to feel better, on average, in countries where there is less inequality, such as the Nordics, where governments help the population by redistributing money from the rich to the poor – which could explain why they feel better on average.

Finally, you may also be interested to read that – overall – there is no difference between women and men in reported levels of happiness, but we are happier:

  • as we get older- up to the mid 70s, this is when health problems start getting more serious
  • when we have a job – yes, work is good for you!
  • when we are married
  • when we socialize with other people.

And of we are also happier when we read interesting texts and get more knowledge, as you are hopefully doing right now.

If you felt happy reading this, there’s plenty more where that comes from in Society at a Glance: OECD Social Indicators.

And thank you OECD Insights blog for keeping our level of happiness up!

Useful links:

World Statistics Day at OECD

OECD Social Policy division

South Africa – winners and losers

The arrival of the World Cup to South Africa is a tribute to that country’s transformation since Apartheid ended in the early 1990s. It’s now a thriving emerging market–the “S” in the BRICS–and participates in the G20 and OECD work too.

But behind this success story lies a troubling and persistent problem – poverty. Based on the national definition of poverty – $4 a day – more than half of South Africans (54%) are poor. And, as the chart below shows, poverty and inequality still reflect race. While the African community’s access to services such as housing, water and electricity has improved substantially, its income continues to lag far behind other social groups. By international standards, this link between race and poverty is remarkably strong. Nor have there been too many signs of this link weakening.