Traditional growth models are not working. Although growth has return in all major regions of the world since the 2008 financial crisis – it has not translated into significant improvements in most people’s lives.
Median wages and living standards continue to stagnate, wages have become decoupled from productivity growth, and meanwhile corporate profits are at record highs in many countries.
People are angry because they still see massive income and wealth gains going to the already very wealthy. This anger is being fuelled by increasing transparency in some cases – we can think of the Panama and Paradise Papers – and also by less benign forces: we’re witnessing the return of populism and spread of misinformation in many places.
This anger is understandable – as inequalities continue to rise, and social discontent with the established political and economic order becomes more widespread, it has never been more important to further our evidence-based work on wealth inequalities and how they affect our societies.
I hope that today we will learn more about why and how such significant wealth inequalities continue to rise, and what we can do about it.
Before Sir John’s speech I would like to set the scene with some of the work the OECD has been doing on inclusive growth and wealth inequalities.
We launched our Inclusive Growth Initiative in 2012 as part of our broader response to the 2008 crisis, and a reappraisal of our entire approach to policymaking called New Approaches to Economic Challenges. This was borne from the reflection that traditional growth models failed to deliver broad-based prosperity for everyone and has failed to deliver sustainable growth within ecological limits.
The IG’s remit is to help governments tackle rising inequalities and provide them with integrated policy packages that address growth and inclusiveness simultaneously. The Initiative has seen several significant successes to date, including the establishment of COPE (the Centre for Opportunities and Equality), the launch of our Champion Mayors for Inclusive Growth, extending the OECD’s research on the productivity-inclusiveness nexus, contributing to the policy recommendations of several multi-lateral fora (such as the G7, G20 and APEC) and influencing many governments’ national IG strategies, such as Canada, Scotland or Italy.
Part of this work is coordinating the research the OECD is doing on inequalities. We have done great work on the statistics side, on issues relating to employment and social policy, on tax policy, and we have produced some fascinating work on wealth inequalities in recent years. And understanding wealth inequality is crucial for our inclusive growth initiative.
We have all heard about the rapid rise in income inequality in recent years. But what’s more troubling is the concentration of wealth at the very top of the distribution.
OECD data indicates that wealth inequality has grown over recent decades, with the richest 10% in the OECD owning around half of all household assets, whilst the bottom 40% owns barely 3%. At the very top of the distribution, the top 1% holds a staggering 19% of total wealth.
For the top quintile of the distribution, financial assets and property make up the biggest shares of their portfolios. Financial assets are particularly important in the Anglophone world.
And what’s interesting is that financial assets are much more unequally distributed than non-financial ones. Across the 28 OECD countries covered by our Wealth Distribution Database, households in the top quintile have on average financial wealth around 72 times that of those in the bottom quintile, compared with around 23 times for real-estate wealth.
OECD research highlights three key mechanisms through which finance contributes to inequalities:
- finance workers are concentrated at the very top of the income distribution and earn premiums unlinked to their productivity compared with their peers in other sectors;
- high earners can and do borrow more so the majority of credit goes to high earners;
- and most of the benefits of stock market expansion goes to affluent households who are able to invest in equities
There is also a strong relationship between home ownership – or lack of – and wealth inequality. We see that generally, high levels of home ownership are linked to low levels of wealth inequality, but the opposite is true when home purchases are highly leveraged through mortgages – lower house prices following purchase can lead to a large number of households experiencing negative equity, thus contributing to higher levels of wealth inequality.
The US, the Netherlands and Denmark are the three countries with the highest levels of wealth inequality and have among the lowest shares of households owning their home outright.
The issue of home ownership is particularly critical in countries where access to quality and affordable housing is limited. As you can see in the graph, many households in OECD countries are overburdened by housing costs.
The median housing cost burden for mortgage payers is about 18% of disposable income and 23% for tenants. The cost burden is much higher for low-income households, on average by more than one-third of disposable income.
Housing conditions, the neighbourhood and environment affect the quality of people’s lives, particularly children’s, and fundamentally influence our capacity to develop as happy, healthy, productive individuals.
Housing and its associated costs is also important for understanding the limited mobility of labour in some countries – this has knock on effects for the productivity of certain regions and firms.
Furthering our research on the interrelationship between housing, wealth inequality and inclusive growth is therefore one of the top priorities for the OECD.
Let me outline briefly what the OECD is doing to help government redress wealth inequalities and promote inclusive growth.
We are working on a Framework for Policy Action on Inclusive Growth. This aims to guide countries on how to design and implement policy packages to improve their performance on a number of key inclusive growth outcomes.
The Framework is underpinned by a dashboard of indicators that diagnoses key inclusive growth trends and challenges for countries and includes a policy mapping exercise that builds on various OECD strategies, such as the Jobs Strategy, Skills Strategy, Innovation Strategy, Growth Strategy and Digital Strategy.
This Framework aims to better sustain and share the benefits of growth by promoting dynamics in a couple of key areas including:
- enabling strong, inclusive markets that prepare people and firms for the future of work by promoting inclusive labour markets, updating social protection systems and boosting productivity growth and business dynamism;
- establishing equal opportunities for all by investing in lifelong learning, promoting regional catching up and investing in communities’ well-being and social capital;
- and re-building trust in government by embedding inclusiveness in policy-making and using data and digital technologies to design citizen-centred policies.
Tax is an important part of the Framework and a policy area where many governments have scope for tax reforms to reconcile growth and inclusiveness. They can do this by broadening tax bases, eliminating loopholes, especially those that mostly benefit wealthier individuals, and by relying more on revenues from immovable property and inheritance taxes.
OECD research has found that recurrent taxes on property are among the least detrimental to growth and are difficult to evade due to the immobility of the assets.
Recurrent taxes on property are also a more efficient alternative to transaction taxes on property, as they do not discourage labour mobility and are less sensitive to macroeconomic volatility, and volatility in the housing market.
Recurrent taxes on immovable property are also progressive, as those with high levels of income are more likely to have more housing wealth.
The inclusive growth agenda, particularly regarding taxation, goes beyond national borders, however. And so of course we should continue to make progress on limiting tax avoidance by wealthy individuals through the use of offshore tax havens and that of multinationals through BEPS and Automatic Exchange of Tax Information.
We will finalise the IG Framework for the OECD’s Ministerial Council Meeting at the end of May. We need to continue to strengthen our research on the drivers of wealth inequalities and provide governments with high-quality policy recommendations to tackle such inequalities. Part of this agenda is the development of national inclusive growth country studies, to help governments design and implement inclusive growth policy reforms.
Let me conclude by reiterating the importance of our work on this topic and on inclusive growth more generally – it is not an easy time to pursue the work we are doing, and we are facing resistance in many places. But that makes our work, and the research being presented by all of you today, even more crucial and I look forward to continuing to push this agenda forward with all of you.
 OECD (2015), In It Together: Why Less Inequality Benefits All, OECD Publishing, Paris, https://www.oecd.org/els/soc/OECD2015-In-It-Together-Chapter1-Overview-Inequality.pdf
 Balestra and Tonkin (2018 forthcoming), INEQUALITIES IN HOUSEHOLD WEALTH ACROSS OECD COUNTRIES:
EVIDENCE FROM THE OECD WEALTH DISTRIBUTION DATABASE, OECD Working Paper.