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Inclusive and sustainable growth in high-income countries
The distributional implications of environ-mental policies to support sustainability vary across income groups and can have beneficial or adverse effects on equity and labor earnings. Policies to encourage agricultural production, for example, can exacerbate off-farm pollution and lead to less efficient use of water, since water charges for farmers rarely reflect real scar-city or environmental costs.
Sustainability requires policies to reduce pollution or resource-intensive produc-tion and consumption. Fostering labor force skills that enable businesses to adopt resource-efficient, sustainable processes and technologies is a central pillar of the transition to low-carbon economies.
Trends in growth and income distribution in high-income countries
Several high-income countries have been fac-ing slow growth and high unemployment since the crisis, while at the same time wit-nessing a gradual, long-term deterioration in the distribution of income. In particular:
Inequality in high-income economies has reached levels unprecedented in the post-World-War-II period. This chapter analyzes the determinants of growth and inequality in those high-income countries that belong to the Organisation for Economic Co-operation and Development (OECD) as well as how improvements in policies affecting labor uti-lization and productivity could make growth more inclusive and sustainable. The main messages are:
Progrowth policies that foster greater labor utilization could reduce poverty levels in high-income OECD countries.1 However, progrowth policies that boost technologi-cal progress, which tends to favor high-skill workers, should not unduly harm poorer, low-skill workers.
Investments in human capital are necessary to promote equality of opportunity, par-ticularly through raising preschool enroll-ment among disadvantaged households and ensuring educational attainment at least through primary school. Any increase in the flexibility of labor markets needs to be balanced with programs, such as unem-ployment benefits, that protect workers, but not jobs.
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The global crisis has taken its toll on potential growth in several countries, essentially because of lower capital inten-sity in production and persistently high unemployment; the unemployment situa-tion risks becoming structural in nature. Recent OECD estimates put the permanent GDP loss associated with the global crisis at about 3 percentage points on average across the OECD (OECD 2013g).
Unemployment has reached close to 49 mil-lion people in the OECD area as a whole, or about 7.9 percent of the labor force. The youth unemployment rate has increased from 12 percent in 2000 to 16.3 percent in 2012. In addition, nearly 8 million youth in OECD countries are neither employed nor enrolled in education or training.
The distribution of income has also deteri-orated in the vast majority of high-income countries: the Gini coefficient average of the OECD area increased from 0.29 in the mid-1990s to 0.32 in 2010 (figure 3.1), and the average income of the richest 10 percent of the population is now about 9.5 times that of the poorest 10 percent,
as opposed to 7 times 25 years ago. In Israel and the United States the income gap reaches 14 to 1, whereas in Chile the income gap is even higher, at 27 to 1.
Income inequalities have been exacerbated by the postcrisis recession. In France, Greece, Ireland, Italy, Slovak Republic, Spain, and Sweden, the crisis even partly or fully reversed the improvements observed between the mid-1990s and 2007 (OECD 2013a). Perhaps most strikingly, income inequality is increasing even in tradition-ally egalitarian high-income stalwarts like Denmark, Germany, and Sweden.
A growing concentration of income among the top-income earners is among the key drivers of rising inequality in many high-income countries. The top 1 percent accounted for 47 percent of total income growth over 19762007 in the United States, 37 percent in Canada, and around 20 percent in Australia, New Zealand, and the United Kingdom (OECD 2014e).
Beyond shared prosperity, the other of the World Bank Groups twin goals, reducing
Mid-1990s Late 2000s
FIGURE 3.1 Trends in income inequality in high-income OECD countriesGini coefficient of disposable income (mid-1990s to 200910)
Source: OECD Income Distribution Database (www.oecd.org/social/inequality.htm), Paris.Note: Income inequality is measured by the Gini coefficient based on equalized household disposable income (after taxes and transfers for total population). Data refer to 1992 for Czech Republic. In this and all other figures, the OECD measure on the x-axis refers to the average of all 34 OECD countries for which data are available, including when possible, as in this figure, the three OECD members that are upper-middle-income countries (Hungary, Mexico, and Turkey).
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extreme poverty by 2030, has largely been achieved in advanced economies. Absolute poverty has trended down over the past 20 years and has been almost eradicated in many high-income OECD countries.2 How-ever, similar to income inequality, relative poverty as measured by the median house-hold disposable income has been rising in many high-income countries (figure 3.2) (OECD 2013a, 2013i). Currently 11 percent of the OECD population lives in relative pov-erty, with rates significantly higher not only in countries such as Israel but also in Japan and the United States. The elderly bereaved, children, and youth are the most affected. Employment considerably reduces the pov-erty risk but does not solve all problems. On average, 8 percent of the workforce lives in relative poverty.
Main drivers of income inequalities
In high-income countries, the single most important driver of rising income inequal-ity has been greater dispersion in wages and salaries between high- and low-skill work-ers. Earnings account for about three-fourths of household income among the working-age population (OECD 2011a). Regula-tory reforms in labor and product markets and institutional changes, which have led to increased competition and greater flex-ibility in product and labor markets, have increased employment opportunities but also contributed to greater wage inequality. In addition, unionization has fallen in most high-income OECD countries, and employ-ment protection legislation has been reduced. Tax and benefits systems have also become less redistributive in many countries since the mid-1990s and no longer have the same cor-rective impact on pretax inequalities. Finally, changes in working conditions have contrib-uted to rising earnings inequality. In many countries, there has been an increase in the prevalence of part-time and atypical labor contracts, as well as a reduction in the cov-erage of collective-bargaining arrangements.
OECD analysis suggests that the impact of globalization on inequality is less pro-nounced than is often thought. Rather, a
0 5 10 15 20 25
Share of population with incomebelow half of median (%)
FIGURE 3.2 Relative poverty in high-income OECD countriesIncome poverty rates (percent of population with income below 50 percent of the median), mid-1980s and 2010 (or most recent)
Source: OECD Income Distribution Database, www.oecd.org/social/inequality.htm.Note: Mid-1980s numbers were computed within interval 198387; end data are for 2010 except for Chile (2011) and Japan, New Zealand, and Switzerland (2009). Relative poverty is defined as the share of persons with income below 50 percent of the median for their country.
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greater impact has come from technological progress, which has been much more benefi-cial to higher-skilled workers. The impact of technology has increased wage dispersion by allowing those with the relevant skills, such as information and communications technol-ogy (ICT) or financial services professionals, to benefit from significant income gains while lower-skill individuals have fallen behind. As a result, the earnings gap between high- and low-skill workers has grown. In some coun-tries, including the United States, skill-based technical change induced a shift in labor demand toward higher skills. Yet the supply of such individuals has not kept pace with rising demand, as indicated by the slowing growth of tertiary