Inequality has risen in the OECD area. Could policies aimed solely at growth be responsible. Can inequality undermine economic growth? New evidence suggests there is a possibility.
Income inequality has widened in most OECD member countries during the past two or three decades. These trends are well documented. According to a traditional measure of inequality, the Gini coefficient, income inequality rose by 10% from the mid-1980s to the late 2000s, while the ratio of top income decile to bottom income decile reached its highest level in 30 years.
From the mid-90s until the late 2000s, the OECD area experienced a sort of “inequality convergence”, as inequality increased in countries such as Sweden, Denmark and Finland, but fell in countries such as Turkey, Mexico and Chile.
Within countries, indicators of inequality, such as the Gini coefficient, say little about who has benefited or lost from these trends. A closer look at the situation of households provides a more complete picture and shows that in many OECD countries, gains in disposable incomes have fallen short of increases in GDP.
This has been particularly the case for poorer households: in nearly all OECD countries for which data are available, GDP growth was substantially higher than households’ income growth in the lowest quintile.
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