Well, the rich are getting richer, and the poor are getting poorer, right. Well, in many countries, such as the US, maybe, but not in the UK. Or at least so says a new report from the OECD. According to the OECD, Canada, Finland and Germany have all seen big rises in inequality since the mid 1990s, and the US, Denmark, Sweden and Norway have all seen small increases in inequality. But, the UK, by contrast, has seen a small decrease in inequality over those years.
Are you surprised by that? Well, you will be more surprised to find out the real truth.
The OECD says economic growth of recent decades has benefited the rich more than the poor. In some countries, such as Canada, Finland, Germany, Italy, Norway and the United States, the gap also increased between the rich and the middle-class.
Countries with a wide distribution of income tend to have more widespread income poverty. Also, social mobility is lower in countries with high inequality, such as Italy, the United Kingdom and the United States, and higher in the Nordic countries where income is distributed more evenly.
Why does it matter? OECD Secretary-General Angel Gurría said: “Growing inequality is divisive. It polarises societies, it divides regions within countries, and it carves up the world between rich and poor. Greater income inequality stifles upward mobility between generations, making it harder for talented and hard-working people to get the rewards they deserve. Ignoring increasing inequality is not an option.”
The OECD report is interesting, but it misses a key point.
Where economists look at inequality, they look at a measure known as the Gini coefficient. There is, however, a flaw with this measure, which means it has totally failed to illustrate the real trend of the last few years.
In the UK, and indeed much of the world, the real change has been the gap between the super rich – say, those in the top 5 per cent and the rest. Thanks to the benefit system, the gap between the poorest and the average, or even the slightly above average, has closed. This trend was what the OECD data reflected.
But the gap between the super rich and the average has soared. This was now shown up by the data.
And this matters for two reasons. Firstly, the benefit system in the UK provides incentives to the super rich to carry on getting richer, but provides fewer incentives in the middle of the range. There is only marginal incentive for some people to come off benefit, and for others to get promoted. And that is one problem with the current system, and could explain why there are regions in the UK with such massive long-term unemployment. To solve the problem, the government needs to be a lot more creative – maybe even maintain benefit payments for a while when someone who was unemployed over a long term finds work.
But there is another reason why it matters, and this is not commonly understood.
Assume that 5 per cent of the population earn 50 per cent of total earnings – the assumption is not right, but make it for the sake of simplicity. Now assume doctors and dentists require a salary putting them in the top 5 per cent. Then assume doctors and dentists make up 0.1 per cent of the population. The maths is simple, it would be very difficult to see how the country could afford their salaries.
That is the main reason why the government has found it so hard to balance the NHS books. And all those people with toothache, made worse because they couldn’t afford a dentist, should blame the way income is so skewered in the UK to the top 5 per cent.
