Inequality hurts economic growth, finds OECD research

Inequality hurts economic growth, finds OECD research

09/12/2014 – Reducing income inequality would boost economic growth, according to new OECD analysis. This work finds that countries where income inequality is decreasing grow faster than those with rising inequality.

The single biggest impact on growth is the widening gap between the lower middle class and poor households compared to the rest of society. Education is the key: a lack of investment in education by the poor is the main factor behind inequality hurting growth.

“This compelling evidence proves that addressing high and growing inequality is critical to promote strong and sustained growth and needs to be at the centre of the policy debate,” said OECD Secretary-General Angel Gurría. “Countries that promote equal opportunity for all from an early age are those that will grow and prosper.”

Rising inequality is estimated to have knocked more than 10 percentage points off growth in Mexico and New Zealand over the past two decades up to the Great Recession. In Italy, the United Kingdom and the United States, the cumulative growth rate would have been six to nine percentage points higher had income disparities not widened, but also in Sweden, Finland and Norway, although from low levels. On the other hand, greater equality helped increase GDP per capita in Spain, France and Ireland prior to the crisis.

The paper finds new evidence that the main mechanism through which inequality affects growth is by undermining education opportunities for children from poor socio-economic backgrounds, lowering social mobility and hampering skills development.

People whose parents have low levels of education see their educational outcomes deteriorate as income inequality rises. By contrast, there is little or no effect on people with middle or high levels of parental educational background.

The impact of inequality on growth stems from the gap between the bottom 40 percent with the rest of society, not just the poorest 10 percent. Anti-poverty programmes will not be enough, says the OECD. Cash transfers and increasing access to public services, such as high-quality education, training and healthcare, are an essential social investment to create greater equality of opportunities in the long run.

The paper also finds no evidence that redistributive policies, such as taxes and social benefits, harm economic growth, provided these policies are well designed, targeted and implemented.

The working paper, Trends in income inequality and its impact on economic growth, is part of the OECD’s New Approaches to Economic Challenges Initiative, an Organisation-wide reflection on the roots and lessons to be learned from the global economic crisis, as well as an exercise to review and update its analytical frameworks.

TRADES

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Craftsmen in ancient Egypt were usually trained and skilled labourers. They were often well-respected in the community and had a comfortable lifestyle. Yet every craftsman’s lifestyle and social standing depended on the quality of his skills and experience. Thus, some craftsmen had more difficult lives than others.Ancient Egyptian workshopMost craftsmen worked in workshops with other craftsmen. Objects for temples or the pharaoh were made in temple workshops or palace workshops. Objects for ordinary people were made by local craftsmen in small workshops.

Have You Ever Taken a Chance in Life? by freefincal

I am a fan of actor Kevin Costner. I think he has taken pretty big career risks,pulled off some and failed in some, but has always stuck to his guns, which is admirable. He has even declared that if his stardom vanishes overnight, he can make a decent living with a blue collar job, because he is skilled.

I saw an YouTube interview yesterday in which he mentioned that, his father regretted never having taken a chance in life and having been in the same job all his life. Costner had to reassure him that he had been a good father who provided all he could for his family.

That set me thinking about my own life. Regular readers would be well aware that as an investor, I am pessimistic, cautious, and always keen to contain downside risk. It might surprise them, (as it did me!), that when it came to my career, I had repeatedly taken chances. Some driven by my heart- a refusal to do something that I don’t like, some was driven by my stupid self-belief.

I once gave up a lucrative contract in Germany because I felt home-sick. One part of me said I was committing career suicide (as did my mentors and many of my friends) and one part of me said, I can work in peace only when I happy.

After coming back home, I worked without pay for 4 months, when my employer took pity and created a makeshift position for me.

For the next 6-8 months, I did not look for any other job but put all my cards on a single job which I was desperate to get as it was the only one that appealed to me.

I got the job and completely changed my area of research. This is again considered professional suicide as it will take at least a couple of years to get published.

Though I was doing quite well, nearly two years later, positions for my dream job -one that involved teaching – was open.

There was fierce pressure from my current employer to prevent me from taking the interview. My father was fighting cancer and I was confined to the hospital taking care of him. I prepared for the interview from there.

Things got to such a point that there was the serious danger of losing both jobs – my current one and my dream job. My father urged me to take the chance. He said he believed in me and asked me to go for it.

The gamble paid off. I got the position but I went ahead and committed career suicide once again(!) by choosing to work in another entirely different research area.

While I did quite well on the teaching front, research was riddled with stumbling blocks. Thanks to some hard-working and spirited students, I was able to set up a decent laboratory.

After nearly a decade of doing this, I think I am all set to commit professional suicide once again! (Sorry can’t say more).

As mentioned above, some of the chances that I took was driven by my heart, and some by ridiculous self-belief that I could pull it off. Sometimes it worked and sometimes it did not. In hindsight, considering my current circumstances, I am glad that I took those chances. Well, at least some of them!

Point of this rant

If you had a chance to take up a job that you truly love, will you take a chance and make an all-out effort to grab it? Even if it meant risking a cushy salary and perhaps your career in a particular area? Will you quit your well-paying job to become an entrepreneur?

I would probably vote, yes, but we will have to accept the consequences without too much regret.

Wealth creation or financial security has two components to it: Income and investing.

Investing is independent of how we earn an income. There are those who have taken some big chances with investing. I dont have the stomach for that. Perhaps because I am always doing stupid things to my “career”.

Income is a different ball game. We could earn from a job we truly love (in which case we wont worry about how much we make) or we could earn from a job we truly hate (in which case, all we care about is how much we make).

Sometimes the time window in which we could shift from a job we hate, to a job we love could be quite tight and narrow

Sometimes we will have to take a chance in life to achieve lasting change and happiness. Sometimes we will have to roll the dice and see how it pans out.

The regret of never having taken a chance could be greater than the consequences of having taken one.