Rising inequality holds back economic growth -- according to a recent report by the Organization for Economic Co-operation and Development (OECD).
The organization, which is primarily composed of high-income countries, analyzed economic growth from 1990 to 2010 and found that almost all 21 examined countries missed out on economic growth due to rising inequalities. (We take a closer look at the countries that were hardest hit in the second half of this post.)
"When income inequality rises, economic growth falls," the authors of the report concluded.
They explained their findings by pointing out that wealth gaps hold back the skills development of children -- particularly those with parents who have a poorer education background. In other words: A lack of access to high-quality and long-term education among poorer citizens in many OECD countries hurts the economy.
The authors did not examine the impact of a country achieving zero inequality (something that would come close to idealized communism), but used inequality levels and economic growth in 1990 as their reference, which they compared to data from 2010.
The wealth gap in OECD countries is now at its highest level since 30 years, as this chart below shows.
Economically, the authors are particularly worried about the gap between low-income households and the rest of the population. "In contrast, no evidence is found that those with high incomes pulling away from the rest of the population harms growth," the authors wrote.
"Since 2008, the argument that inequality is causing economic losses has gained steam. But the fact that this study was released by the OECD has surprised me," Dean Baker, co-director of the Center for Economic and Policy Research, told The Washington Post. Particularly before the financial crisis, many economists considered inequality as a useful corollary to economic growth -- an assumption the recent OECD study tries to rebuke.
Here are the countries that missed out on most growth, according to the OECD:
1. New Zealand: New Zealand's economy could have grown by 44 percent between 1990 and 2010, but the country did only achieve 28 percent growth due to inequality. Hence, it lost 15.5 percentage points -- more than any other country. This is particularly surprising, given that New Zealand was once considered a paradise of equality, as Max Rashbrooke, the author of a book called Inequality: A New Zealand Crisis, pointed out in the Guardian newspaper.
"New Zealand halved its top tax rate, cut benefits by up to a quarter of their value, and dramatically reduced the bargaining power – and therefore the share of national income – of ordinary workers. Thousands of people lost their jobs as manufacturing work went overseas, and there was no significant response with increased trade training or skills programs, a policy failure that is ongoing," Rashbrooke writes in the op-ed. He also blames New Zealand for a lack of affordable homes which led to higher rents and unpaid mortgages.
2. Mexico: Among all 21 examined OECD countries, Mexico has the highest level of inequality and missed out on 11 percent of potential economic growth, according to the Gini coefficient, a commonly used measurement method.
In May, photographer Oscar Ruiz captured Mexico's inequality in aerial footage. The subtitle that accompanies the photos reads: "This image has not been modified. It's time to change that."
3. Britain, Finland and Norway: These countries missed out on nearly 9 percentage points of economic growth. While Britain is among the OECD's most unequal countries, Finland and Norway had low inequality levels in 1990 and continued to do so in 2010. Nevertheless, inequality increased in both Scandinavian countries (and particularly in Finland).
4. United States, Italy and Sweden: Between six and seven percentage points of potential growth were knocked off by inequality between 1990 and 2010. The report does not offer individual explanations why those countries rank among the nations that are hardest hit.
Spain, France and Ireland, however, are the only countries that did not miss out on economic growth. According to the authors of the study, all three countries have decreased or maintained the extent of inequality and made economic gains as a consequence.
So, what do other countries have to learn from France, Ireland and Spain? The study offers several proposals:
Besides improvements in access to and quality of education, governments should work on fairer labor-market policies, childcare supports and in-work benefits, according to the OECD experts.
Taxes, transfers and other redistribution policies could furthermore ensure that economic growth benefits those who need it most.