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The income gap has risen in the UK to such an extent that the richest 10% are now about nine times higher than that of the poorest 10%, according to a new OECD report.
It says the income gap in OECD countries has reached its highest level for over over 30 years, and governments must act quickly to tackle inequality. It says part of the reason is the rise in flexible and part-time working, which has brought more women into the market, but has increased the income gap.
The report comes as the UK’s deputy prime minister says the Government is preparing to crack down on excessive pay for top executives in the private sector. He said the Government will publish proposals on how to achieve this next month.
The OECD report “Divided We Stand: Why Inequality Keeps Rising” finds the income gap has risen even in traditionally egalitarian countries, such as Germany, Denmark and Sweden, from 5 to 1 in the 1980s to 6 to 1 today. The gap is 10 to 1 in Italy, Japan, Korea and the United Kingdom, and higher still, at 14 to 1 in Israel, Turkey and the United States.
OECD Secretary-General Angel Gurría said: “The social contract is starting to unravel in many countries. This study dispels the assumptions that the benefits of economic growth will automatically trickle down to the disadvantaged and that greater inequality fosters greater social mobility. Without a comprehensive strategy for inclusive growth, inequality will continue to rise.”
The main driver behind rising income gaps has been greater inequality in wages and salaries, as the high-skilled have benefitted more from technological progress than the low-skilled, says the OECD. Reforms to boost competition and to make labour markets more adaptable, for example, by promoting part-time work or more flexible hours, have promoted productivity and brought more people into work, especially women and low-paid workers. But the rise in part-time and low-paid work also extended the wage gap.
Tax and benefit systems play a major role in reducing market-driven inequality, but have become less effective at redistributing income since the mid-1990s, says the report. The main reason lies on the benefits side: benefits levels fell in nearly all OECD countries, eligibility rules were tightened to contain spending on social protection, and transfers to the poorest failed to keep pace with earnings growth.
As a result, the benefit system in most countries has become less effective in reducing inequalities over the past 15 years, it states.
Another factor has been a cut in top tax rates for high-earners.
“There is nothing inevitable about high and growing inequalities,” said Gurría. “Our report clearly indicates that upskilling of the workforce is by far the most powerful instrument to counter rising income inequality. The investment in people must begin in early childhood and be followed through into formal education and work.”
The OECD underlines the need for governments to review their tax systems to ensure that wealthier individuals contribute their fair share of the tax burden. This can be achieved by raising marginal tax rates on the rich but also improving tax compliance, eliminating tax deductions, and reassessing the role of taxes in all forms of property and wealth, the report says.