OECD Social, Employment and Migration Working Papers, No. 163 In most OECD countries, the gap between rich and poor is at its highest level since 30 years. Today, the richest 10 per cent of the population in the OECD area earn 9.5 times the income of the poorest 10 per cent; in the 1980s this ratio stood at 7:1 and has been rising continuously ever since. However, the rise in overall income inequality is not (only) about surging top income shares: often, incomes at the bottom grew much slower during the prosperous years and fell during downturns, putting relative (and in some countries, absolute) income poverty on the radar of policy concerns. This paper explores whether such developments may have an impact on economic performance.

Among the paper’s key findings:
-The gap between rich and poor is now at its highest level in 30 years in most OECD countries.

-This long-term trend increase in income inequality has curbed economic growth significantly.

-While the overall increase in income inequality is also driven by the very rich 1% pulling away, what matters most for growth are families with lower incomes slipping behind.

-This negative effect of inequality on growth is determined not just by the poorest income decile but actually by the bottom 40% of income earners.

-This is because inter alia people from disadvantaged social backgrounds underinvest in their education.

-Tackling inequality through tax and transfer policies does not harm growth, provided these policies are well designed and implemented.

-In particular, redistribution efforts should focus on families with children and youth, as this is where key decisions on human capital investment are made and should promote skills development and learning across people’s lives.

DOI : 10.1787/1815199x