In It Together: Why Less Inequality Benefits All

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The gap between rich and poor keeps widening. Growth, if any, has disproportionally benefited higher income groups while lower income households have been left behind. This long-run increase in income inequality not only raises social and political concerns, but also economic ones. It tends to drag down GDP growth, due to the rising distance of the lower 40% from the rest of society. Lower income people have been prevented from realising their human capital potential, which is bad for the economy as a whole. This book highlights the key areas where inequalities are created and where new policies are required, including: the consequences of current consolidation policies; structural labour market changes with rising non-standard work and job polarization; persisting gender gaps; the challenge of high wealth concentration, and the role for redistribution policies.

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The impact of income inequality on economic growth

Drawing on harmonised data covering the OECD countries over the past 30 years, this chapter first explores whether income inequality has an impact on subsequent growth. In particular, it focuses on the growth consequences of income inequality in different parts of the income distribution, using measures of “top” and “bottom” inequality. The chapter then evaluates the “human capital accumulation theory”, one prominent channel through which inequality is supposed to affect economic growth. Exploiting micro data from the Adult Skills Survey (PIAAC), it looks at the consequences of income inequality for the skills development of individuals with different parental education backgrounds, both in terms of the quantity of education attained (e.g. years of schooling) and in terms of its quality (e.g. skill proficiency).

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