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

The anxieties of the rich

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“What’s it like to have too much money?” Vanity Fair asked recently. “Very stressful.” The problem, it seems, is that even the humongously rich grow tired of just buying stuff. If you already own a dozen houses, a 13th is unlikely to make all that much of a difference. The same goes for sports cars, private jets, yachts, diamond necklaces and anything else you might care to splurge on.

So, after a while, you stop worrying about quantity and begin obsessing about quality: “What you need is to have not just the most but the very, very best,” writes A.A. Gill in the magazine, “ … a slightly better loafer, a pullover made from some even more absurdly endangered fur.” The name for this concern? Perfection anxiety.

Sadly, perfection anxiety is not the only worry creasing the botoxed brows of the super-rich. A few years back, there was the financial crisis, which threatened to knock a hole in their fortunes. And, more recently, there’s been what Paul Krugman calls the “Piketty Panic,” the tidal wave of publicity surrounding a new study that warns of a return to Victorian-era wealth divisions in our societies. We’ll come back to that in a moment, but, first, what about the crisis – did it hurt high-earners?

It did, says a new paper (pdf) from the OECD, but not for long. In nine OECD countries for which data are available, the top 1% of earners saw their incomes slide by 3% in 2008, followed by an even bigger fall of 6.6% in 2009. But as the incomes of high earners tend to be very responsive to economic swings, these sorts of declines in a recession aren’t such a surprise. Indeed, by 2010, the worst was over: The incomes of the top 1% rose by 4% while pretty much everyone else’s stagnated.

These temporary dips also didn’t do much to alter long-term trends. Top earners’ incomes remain at historic levels in many OECD countries, confirming a trend that has been developing for around three decades. In effect, what’s happened is that, as the economic pie grows, top earners have been taking an ever bigger slice of it. In the US, for example, the share of pre-tax income wending its way to the top 1% more than doubled since 1980, hitting 20% in 2012. There were notable rises in other (mostly) English-speaking countries, too, notably Australia, Canada, Ireland and the UK. More surprising, the 1% in traditionally egalitarian economies like Finland, Norway and Sweden also saw rises in their share of income, although at around 7 to 8% they were well behind US levels.

Not much of this will be unfamiliar to anyone who’s been following the debate over rising income inequality. But in recent weeks, discussion has been focusing on another side of the debate: wealth – rather than income – inequality. That might sound like hair-splitting, but the difference matters. To simplify greatly, income represents your earnings, typically from your salary or wages – think of it as a flow. By contrast, wealth is a stock – it’s the accumulation of income in your bank account that you haven’t frittered away, as well as your assets.

In the debate over inequality, income attracts most of the attention because it’s the best indicator of people’s ability to put food on the table and pay the bills. But thanks to Thomas Piketty, author of Capital in the Twenty-First Century, a 700-page economics tome that’s crashing the top of the bestseller lists, wealth is now also getting a lot of attention.

Piketty argues, in effect, that the gap between the super-rich and everyone else will increasingly be driven by wealth, rather than income (definitions of wealth vary, but Piketty broadly equates it with capital). To explain: Much of the justification for the rising gap between the super-rich and everyone else in recent decades revolves around the idea that they essentially deserved to earn their fortunes – Bill Gates created software that everyone wanted, and reaped his rewards.

But in future, the super-rich may be more likely to inherit their fortunes, rather than earn them. That’s because, argues Piketty, the rate of return on capital, typically around 5%, will outpace economic growth, these days often no more than 2%. So instead of worrying about gaps between those on high salaries and those on low salaries, in future we’re more likely to be concerned by the division between those on salaries and those with inherited wealth. Sounds familiar? Yes, it’s the world of Jane Austen all over again.

To say that Piketty’s book has been getting noticed would be an understatement: Martin Wolf calls it “extraordinarily important”, while the World Bank’s Branko Milanovic calls it “one of the watershed books in economic thinking”; others are less complimentary, criticising the data for being too thin to support the conclusions or accusing Piketty of promoting “soft Marxism”.

Whether you agree with his findings or not, there’s no doubt that the attention given to Piketty’s book, and to research by others, including the OECD, on inequality only underlines growing concern about the impact of rising divisions on our societies and economies. Anxious times, indeed.

Inequality will be under discussion at OECD Week(5-7 May 2014), which will see publication of a new report, “All on Board: Making Inclusive Growth Happen”. Watch out also for sessions at the OECD Forum on inclusive societies and jobs and inequality.

Useful links

We’re all free to be poor (OECD Insights blog)

OECD work on inequality

Divided We Stand (OECD, 2011)

Growing Unequal (OECD, 2008)

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

Disasters and the traps of poverty and wealth

UN HQ in Haiti after the earthquake

Today’s post is contributed by John Mutter, Professor of Earth and Environmental Sciences/Professor of International and Public Affairs and Director of PhD in Sustainable Development, Columbia University, NY

We like to categorize disasters into two types – natural and man-made. 2011 has begun with massive flooding in agricultural regions of Northeast Australia causing shoppers to brace for the inevitable increase in food prices that will soon follow. Just one death so far though and no doubt the rugged Australian farmer will get through this latest assault by Nature.

In 2010 we had a very well publicized example of a disaster of the man-made type in the Deepwater Horizon oil spill in the Gulf of Mexico where 11 workers were killed and an enormous drilling structure incinerated and crumpled onto the sea floor causing an oil spill of historic proportions that threatened the Gulf coast. Pundits kept upping the drama of the event from the worst environmental disaster ever, to Obama’s Katrina, Obama’s 9/11 and even Obama’s Cuban Missile Crisis! None of this proved to be true and given the scale of the event itself – more oil released into the ocean than ever before – the scale of environmental damage seems to be not so great, not compared to what we all thought might be the consequences. We were all expecting thousands upon thousands of oil soaked seabirds but there were relatively few and just days after the seafloor gusher was finally plugged there was hardly any oil to be found anywhere.

On Boxing Day the New York Times published an extensive analysis of what went wrong 50 miles offshore Louisiana, the mistakes that were made many from inaction by workers on the drill rig though disaster was staring them in the face. The Times did not say so outright but it does seem that disaster could have been avoided. Certainly people will be held accountable. Someone will be blamed; perhaps many people will share the blame.

Who do we blame for the earthquake in Haiti earlier in the year on January 11th that killed around a quarter of a million people? (more…)