Skip to content
Institute of Economic Affairs

Institute of Economic Affairs

Institute of Economic Affairs

Sunday February 28, 2021
  • twitter
  • facebook
  • rss
  • Institute of Economic Affairs
  • Home
  • About
  • Staff
  • Jobs
  • Epicenter
  • Contact Us
  • twitter
  • facebook
  • rss
  • Blog
  • Film
  • Coronavirus
  • Research
    • Publications
    • Economic Affairs
    • EA Magazine
    • Brexit Unit
    • Int. Trade & Competition Unit
    • SMPC
    • Paragon Initiative
  • Media
    • Media Coverage
    • Press Releases
    • Media Enquiries
    • About IEA Comms
  • Students
    • Internships
    • Events and Conferences
    • Essay Competition
    • Student Resources
    • IEA Budget Challenge
    • Economics101
  • Events
    • Forthcoming Events
    • Past Events
  • Donate
    • Donate Now
    • Donate Monthly
    • Donate to IEA Projects
    • Other Ways to Donate
    • Legacy Gift
    • Donate from USA
    • Contact Us
  • Home
  • About
  • Staff
  • Jobs
  • Epicenter
  • Contact Us

Does inequality hurt economic growth?

Matthew Sinclair
11 December 2014
Institute of Economic Affairs > Blog > Policies > Trade, Development, and Immigration
The headline is quite simple: ‘Inequality hurts economic growth, finds OECD research’. The reality is somewhat more complex. Here are four things you need to know about the new OECD report:

  1. It’s not really about inequality. If a rich man earns an extra £10 a year, it adds to inequality in the same way it does if a poor man earns £10 less each year. That’s why the likes of Thomas Piketty – who really is worried about inequality – get very wound up about the Mark Zuckerbergs of this world. But the new OECD report explicitly says that ‘no evidence is found that those with high incomes pulling away from the rest of the population harms growth’. It’s really about low incomes. ‘Poverty’ would be a better word than inequality.

  2. The mechanism by which low incomes are found to inhibit economic growth is that ‘increased income disparities depress skills development among individuals with poorer parental education background’. In other words, if you’re poor and your parents didn’t get much of an education, you’re not as likely to develop the skills you might otherwise and you’ll struggle to engage with the labour market. If there are a lot of people in that situation in a country, people without the human capital to engage with the opportunities that a growing capitalist economy creates, then that will diminish economic growth over time. That is not really surprising. It fits with a conventional understanding of how social and educational dysfunction is preventing some people responding to the incentive to develop human capital, which is not great for growth.

  3. The report does not contain much evidence about what kinds of policies might help. Their well-trumpeted findings about the effects of redistribution are based on ‘a partial and relatively crude measure of redistribution’. If you are interested in what policies might work, there are two obvious candidates: a) education reforms, this report inadvertently makes an excellent case for schools that answer to parents, not bureaucracies captured by producer interests (and further reforms so such schools can expand more quickly); b) welfare reforms to engage people in the labour market: research by RAND looking at the US welfare reform experiments strongly suggests that the right mix is improved financial incentives and robust work requirements.

  4. The final results are still a bit…funny. The economies where inequality increased the most in the run up to the crisis were ‘the English-speaking countries’ and ‘Israel, Germany and Sweden’. Those economies did not do badly at all over the period. That raises the question of whether there are other growth effects related to inequality which they have missed, or controlled away (perhaps related to those entrepreneurs who make a lot of money but still only capture about 2 per cent of the benefits created by their innovations, we get the rest).


There is nothing wrong with a new contribution to the debate over the structure of our economy and those who are to some extent left on the outside looking in when it grows. This is an interesting report. Sadly the OECD has gone for the sexy headline about inequality, trying to cash in on Piketty-mania.

The danger is that the report could therefore contribute to a focus on crude redistribution, instead of more challenging but more effective policy reforms to address the obstacles to people investing in education and engaging in the labour market (where they will build up their human capital). That would be a sad result for a supranational organisation that is supposed to help inform policy but has instead been chasing headlines.

Matthew Sinclair
Matthew Sinclair is a senior consultant at Europe Economics.

SIGN UP FOR IEA EMAILS

Share this Story

previousLifestyle EconomicsWho's killing the British pub?Christopher Snowdon10 December 2014
nextRegulationHow not to lie with pub closure statisticsChristopher Snowdon11 December 2014
latestHealthcareViral Myths: a response to my critics (Part 2)Kristian Niemietz25 February 2021
previous
Lifestyle Economics

Who's killing the British pub?

10 December 2014
next
Regulation

How not to lie with pub closure statistics

11 December 2014
latest
Healthcare

Viral Myths: a response to my critics (Part 2)

11 December 2014
Institute of Economic Affairs
BE PART OF THE IEA TODAY
  • Donate
  • Like
  • Follow
  • Watch

NEWSLETTER SIGN UP

Privacy Policy
© Institute of Economic Affairs
REGISTERED IN ENGLAND 755502, CHARITY NO. CC/235 351, LIMITED BY GUARANTEE
×
We use cookies on our website to give you the most relevant experience by remembering your preferences and repeat visits. By clicking “Accept”, you consent to the use of ALL the cookies. However you may visit Cookie Settings to provide a controlled consent.
Cookie settingsACCEPT
Privacy & Cookies Policy

Privacy Overview

This website uses cookies to improve your experience while you navigate through the website. Out of these cookies, the cookies that are categorized as necessary are stored on your browser as they are essential for the working of basic functionalities of the website. We also use third-party cookies that help us analyze and understand how you use this website. These cookies will be stored in your browser only with your consent. You also have the option to opt-out of these cookies. But opting out of some of these cookies may have an effect on your browsing experience.
Necessary
Always Enabled

Necessary cookies are absolutely essential for the website to function properly. This category only includes cookies that ensures basic functionalities and security features of the website. These cookies do not store any personal information.

Advertisement

Advertisement cookies are used to provide visitors with relevant ads and marketing campaigns. These cookies track visitors across websites and collect information to provide customized ads.

Performance

Performance cookies are used to understand and analyze the key performance indexes of the website which helps in delivering a better user experience for the visitors.

Analytics

Analytical cookies are used to understand how visitors interact with the website. These cookies help provide information on metrics the number of visitors, bounce rate, traffic source, etc.

Functional

Functional cookies help to perform certain functionalities like sharing the content of the website on social media platforms, collect feedbacks, and other third-party features.

Uncategorized

Undefined cookies are those that are being analyzed and have not been classified into a category as yet.

Save & Accept
Powered by CookieYes