My Daily Column – Income Distribution and Growth

Income distribution is currently a major topic as the crisis has persistent effects. We remember during fall of 2011 the “Occupy Wall Street” movement. More recently Thomas Piketty‘s book gave a framework to analyze and to understand deformations in income distribution. Piketty suggests that the economic dynamics doesn’t spontaneously converge to a fair situation and that corrective measures may be needed.

Nevertheless we didn’t have an analysis linking income distribution and growth.
In a recent document, OECD gave some answers to this question that divides economists: Is an unequal income distribution a key-element to create incentives for growth? Or: Is a narrow income distribution the clue for a strong growth? We understand that answers are necessary to understand how economies move in the long-term.

There is no ambiguity in the OECD’s answer. Rising inequality in income distribution has a lasting negative impact on growth.

A simple measure of the change in income distribution is to calculate the ratio of the income of the richest 10% to the income of the poorest 10%. From the mid 80 to now the ratio jumped from 7 to 9.5. It’s a strong deformation.
A measure by country, Gini coefficient, shows that for 21 countries analyzed, 16 have higher inequalities; 2 have lower inequalities (Greece and Turkey) and for three countries the story is unchanged: Belgium, the Netherlands and France.

The impact of income inequalities on growth is significant. From 1990 to 2010 the OECD document shows that increased inequalities have a negative impact of 10% on GDP in Mexico and New Zealand; 9% for the United Kingdom and 6 to 7 % for the USA, Sweden and Italy. This means that from 1990 to 2010 the impact for the United Kingdom of higher income inequalities was negative by 9% on GDP. Without change in income inequalities, GDP would have been 9% higher at the end.
For France, the OECD said that the impact of income inequalities was not significant as the study didn’t find a change in inequality on the period.

OECD explains that the main reason for this negative impact on growth comes from access to education. Poor people have a more limited access to education and so their human capital cannot increase as it can with wealthier people. The OECD adds that this concern on education is related not the poorest 10% but to the poorest 40%. It’s a real issue for a very large part of the population. That’s probably why there is still a role for the government in the education process.
Innovation is at the center of the growth process and it depends more on people than on technical process. That’s why education is the key element for growth.

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