Don Cayo: In my opinion
The poor get poorer: In OECD countries, the bottom 40 per cent have just 3 per cent of total wealth — affecting growth for all
The growing gap between rich and poor is stunting growth and entrenching inequality in developed economies like ours.
It’s scarcely news that modern economies are fuelling the tendency for the rich to get richer at a faster pace than the rest of us in good times, in bad times and in between.
But a new study from the Organization for Economic Cooperation and Development casts light on another aspect of growing income inequality around the world. It’s the relative decline of those at the other end of the income continuum — not just the bottom 10 per cent, but the lowest 40 per cent.
“Beyond its impact on social cohesion,” the 320-page report says, “growing inequality is harmful for long-term economic growth. The rise of income inequality between 1985 and 2005, for example, is estimated to have knocked 4.7 percentage points off cumulative growth between 1990 and 2010, on average across OECD countries.”
A key driver, it says, is the growing gap between the bottom 40 per cent and the rest of the population. What happens is this large segment of the population can’t afford to invest — not in assets, and not in education.
The inability of low income people to purchase or maintain assets means the gap between rich and poor households grows much faster and larger than the income gap.
In B.C., for example, StatsCan figures indicate the top one per cent earn 9.7 per cent of total income.
Yet, “on average, the 10 per cent of wealthiest households hold half of total wealth,” the OECD study said. “The next 50 per cent hold almost the other half, while the 40 per cent least wealthy own a little over three per cent.”
Inability to invest in education is even more problematic, dragging down both families’ prospects and the country’s productive capacity.
“The rise of income inequality between 1985 and 2005, for example, is estimated to have knocked 4.7 percentage points off cumulative growth between 1990 and 2010, on average across OECD countries,” it said.
In most of the report’s rankings — poverty levels, income distribution and so on — Canada is pretty much middle of the pack. But in one area, household wealth, we stand out.
The study (using constant 2005 U.S. dollars) pegged our average household wealth of about $350,000 as third-best, behind only Luxembourg (about $600,000) and the U.S. (about $400,000).
This would appear to bolster the argument of critics who play down worries about income inequality on the grounds that as long as everyone is doing better over time, it doesn’t matter how wide the gap is.
But this average figure is dragged up — in this case, way up — by those who have great wealth, and thus it distorts the picture of where most Canadians stand. The report notes that the median — that is, the mid-point with half the population having more wealth and half having less — is much more telling, and it’s less than half this average figure.
Growing inequality has been driven by two main factors, the report said — much faster-rising earnings for workers with skills in high-demand sectors like IT, and the erosion of tax/transfer policies that used to moderate the gap.
Thus, “While income inequality before taxes and benefits continued to rise, the cushioning effect of taxes and benefits has become weaker, accelerating the overall upward trend in disposable income inequality.”
Its prescription is for governments to focus on policies that create more and better jobs “that are stepping stones rather than dead ends,” as well as skills development and education.
It also calls for tax policies that ensure both wealthy individuals and multinational firms pay a fair share of taxes, though it does not suggest what this share should be.