If you asked a typical person to list the major problems that the world faces today, the likelihood is that "inequality and poverty" would be one of the first things they mentioned. There is a widespread concern that economic growth is not being shared fairly. A poll by the BBC in February 2008 suggested that about two-third of the population in 34 countries thought that "the economic developments of the last few years" have not been shared fairly. In Korea, Portugal, Italy, Japan and Turkey, over 80% of respondents agreed with this statement.* There are many other polls and studies which suggest the same thing.
The Distribution of Household Income in OECD Countries
Income inequality has increased moderately but significantly over the past two decades, although with differences in the timing, intensity and even direction of these changes across countries. The wide cross-country differences in the overall shape of the income distribution at a point in time imply similarly large differences in income levels for people at similar points of the distribution – with some of the OECD countries topping the OECD league at one end of the distribution falling further behind when considering the other end.
Changes in Demography and Living Arrangements
Changes in demographic structures and lower household sizes have dampened the economic welfare of OECD populations. They have also contributed to wider income inequalities because of the increased importance of people living alone and of lone parents. These changes have been accompanied by significant shifts in the relative income of various groups, with people in their later working life gaining the most and those entering the labour market and lone parents losing ground.
Earnings and Income Inequality
Wage disparities among full-time workers have increased over the past two decades. These disparities are much wider when looking at personal earnings of all workers, reflecting differences in the amount of work performed over the year. When looking at the distribution across the entire working-age population – whether working or not – the concentration of household earnings has remained broadly stable over the past decade, while that of capital and self-employment income has increased markedly.
How Much Redistribution Do Governments Achieve? The Role of Cash Transfers and Household Taxes
OECD countries differ significantly in how much income they redistribute through government cash transfers and household taxes – and those countries that redistribute more achieve a more narrow distribution of final income. The redistribution achieved by public cash transfers is generally larger than that of household taxes, and countries that have more targeted programmes tend to spend less than others.
Poverty in OECD Countries
Poverty rates have increased over the past decade, especially among children and people of working age. Most of this rise reflects the lower redistribution towards people at the bottom of the income scale. As a result of these changes, the risk of poverty has shifted from the elderly towards youths. Work is very effective to avoid the risk of poverty, nevertheless most poor people belong to households with some earnings.
Does Income Poverty Last Over Time? Evidence from Longitudinal Data
Less than one third of people with income of less than half of median income are persistently in that condition over a three-year period, but only a small share of them move into higher strata of the distribution. Entries into poverty mainly reflect family- and job-related events, but the share of unidentified events is also important. Countries with higher poverty headcounts based on static income measures also record higher rates of persistent and recurrent poverty.
Based on a measure that aggregates data on the prevalence of different types of deprivation, non-income poverty is higher in countries with lower per capita income and higher relative income poverty headcounts. The experience of deprivation declines monotonically with people’s income and age. In a given year, a large share of the income poor are not materially deprived while, conversely, a large share of the population experience either low income or deprivation.
Income, education, occupation and personality traits all tend to be transmitted from parents to their offspring, especially at the top and bottom of the distribution. Countries with lower intergenerational mobility tend to feature wider income inequalities at a point in time and higher returns to education – suggesting that the education systems and the strategies used by parents for the education of their children are very important for the transmission of disadvantages from generation to generation.
Public services to households significantly narrow inequality, although this reduction is typically lower than that achieved by the combined effect of household taxes and public cash transfers. This inequality-reducing effect results mainly from a relatively uniform distribution of these services across the population, which implies that they account for a larger share of the resources of people at the bottom of the distribution than at the top.
How is Household Wealth Distributed? Evidence from the Luxembourg Wealth Study
There are significant cross-country differences in both levels and distribution of household wealth compared that of income, which partly depend on the definition of wealth and on the measures used to summarise its distribution. Many of those who are classified as income poor do have some assets, although the "median" poor has negligible financial assets in all countries covered. Disposable income and net worth are positively correlated across individuals, and this association holds even after controlling for personal characteristics such as age and education.
Inequality in the Distribution of Economic Resources
Better information on how cash income and other types of resources are distributed within society is critical to address rising concerns about poverty and inequality. This information has implications for policies, as it highlights the importance of national circumstances for the success of different programmes and strategies. By providing information on more homogeneous groups within society, these data are also essential to bridge the gap between official statistics based on macro aggregates for economy-wide income and individuals’ perceptions of their own conditions.
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