1. Reconciling inequality and growth
objectives: can it be done?
Isabell Koske
OECD, Economics Department
23 January 2012

2. Background of the study
Economic context
• Income inequality was high and rising in many OECD
countries even before the crisis.
• Possible trade-offs and/or complementarities between
growth and inequality goals.
Context
Main objective of the study:
• Identifying win-win policies that help foster growth and
reduce income inequality, but also those that entail
trade-offs between the two objectives.

3. Inequality in household disposable income
varies considerably across countries.
Gap between the 10th and the 90th centile and the Gini index
Income inequality – an overview
Household disposable income in the late 2000s
10 0.6
9
0.5
8
7
0.4
6
5 0.3
4
0.2
3
2
0.1
1
0 0.0
SVN
KOR
ISR
FIN
SVK
AUT
CZE
HUN
ITA
JPN
USA
ISL
LUX
GBR
GRC
DNK
CHL
OECD
ESP
FRA
AUS
SWE
NOR
EST
NLD
POL
CHE
PRT
CAN
DEU
TUR
NZL
IRL
MEX
BEL
Centile ratio (left scale) Gini coefficient (right scale)

4. Understanding inequality:
accounting framework and policy levers
Family Self- Individual
Taxes &
formation employment consumption
Income inequality – an overview
cash
and & capital of public
transfers
composition income goods
Household
Individual Household Household Household
adjusted
labour labour market disposable
disposable
income income income income
income
Education & Family Tax policies Cash transfers Education &
labour market policies (wealth, and tax policies health
policies, (child and capital (access &
migration & elderly care), income) coverage)
gender policies etc. policies
etc.

5. The sources of inequality in household labour
income vary across countries.
Labour income inequality in the OECD
The distribution of labour income
Gini coefficients, late 2000s
0.75
0.70
0.65
0.60
0.55
0.50
0.45
0.40
0.35
0.30
0.25
0.20
SWE
NOR
POL
EST
DEU
CHE
CAN
PRT
KOR
SVN
IRL
ISR
FIN
AUT
BEL
JPN
ITA
SVK
ISL
HUN
CZE
BRA
OECD
LUX
GBR
USA
FRA
AUS
GRC
DNK
ESP
CHL
NLD
Indivdiual labour income (full-time employed)
Individual labour income (working-age population)
Household labour income

6. Where in the distribution are individual labour
earnings most dispersed?
Labour income inequality among full-time employees, 2008
The distribution of labour income
Centile ratio 50/10
3.0
2.5
2.0
1.5
1.0
0.5
0.0
KOR
ISR
FIN
AUT
HUN
JPN
ITA
CZE
ISL
OECD
USA
GBR
GRC
AUS
SWE
FRA
DNK
ESP
NOR
NLD
POL
DEU
PRT
CHE
CAN
IRL
NZL
BEL
Centile ratio 90/50
3.0
2.5
2.0
1.5
1.0
0.5
0.0
SWE
NOR
POL
PRT
DEU
CHE
CAN
NZL
KOR
IRL
ISR
FIN
BEL
HUN
AUT
CZE
ITA
ISL
JPN
OECD
GBR
USA
ESP
GRC
DNK
AUS
FRA
NLD

7. Workers in the financial sector enjoy an income
premium, particularly at the top.
Income premium of working in financial intermediation
rather than in manufacturing
The distribution of labour income
Cross-country average, 2008 or latest available year
60%
50%
40%
30%
20%
10%
0%
10 20 30 40 50 60 70 80 90
Income quantile

8. Higher union membership tends to be associated
with lower wage dispersion.
Wage premium of union membership
The distribution of labour income
Cross-country average, 2008 or latest available year
40%
30%
20%
10%
0%
-10%
10 20 30 40 50 60 70 80 90
Income quantile

9. Taxes and transfers reduce market income
inequality by about one-fourth.
Gini coefficient of market income and disposable income
Late 2000s
0.55
The tax and transfer system
0.50
0.45
0.40
0.35
0.30
0.25
0.20
0.15
0.10
0.05
0.00
SWE
NOR
POL
EST
DEU
PRT
CHE
CAN
SVN
NZL
KOR
FIN
ISR
SVK
AUT
BEL
JPN
ISL
ITA
USA
LUX
CZE
OECD
ESP
GBR
DNK
FRA
CHL
AUS
NLD
Market income Disposable income

10. In most, but not all countries the redistributive
impact of transfers is higher than that of taxes
The redistributive impact of taxes and transfers
Point reduction in concentration coefficients, late 2000s
0.18
The tax and transfer system
0.16
0.14
0.12
0.10
0.08
0.06
0.04
0.02
0.00
SVN
FIN
KOR
ISR
AUT
JPN
ITA
SVK
ISL
CZE
LUX
OECD
USA
GBR
FRA
CHL
DNK
AUS
ESP
SWE
NOR
POL
EST
NLD
CHE
DEU
CAN
PRT
NZL
IRL
BEL
Household taxes Public cash transfers

11. The size and composition of public cash
transfers vary across OECD countries.
Public cash transfers to households
Percent of GDP, 2007
20
The tax and transfer system
18
16
14
12
10
8
6
4
2
0
OECD
MEX
ITA
DEU
CAN
DNK
BEL
CHL
SVK
AUS
AUS
IRL
HUN
GBR
SVN
USA
GRC
NOR
CZE
POL
LUX
ISL
ISR
ESP
FRA
CHE
FIN
JPN
EST
NZL
PRT
NLD
KOR
TUR
SWE
Old age Incapacity Family Unemployment Other social policy areas

12. The redistributive impact of the tax system is
a function of its size and progressivity.
Size and composition of total tax revenues
2009
% of GDP
The tax and transfer system
60
50
40
30
20
10
0
SWE
NOR
EST
POL
PRT
CAN
CHE
DEU
TUR
SVN
NZL
IRL
ISR
FIN
KOR
SVK
ITA
HUN
BEL
AUT
JPN
USA
CZE
ISL
OECD
LUX
GBR
GRC
ESP
AUS
FRA
DNK
NLD
Personal income taxes Corporate income taxes
SSCs and payroll taxes Taxes on goods and services
Other Progressivity of household taxes (right axis)

13. Measures to improve human capital are clear
win-win strategies.
Labour
Employment Earnings GDP per
A rise in: income
rate equality capita
equality
Equity in education ? + + +
Upper-secondary and tertiary
Impact of policies
? + + +
graduation rates
Initiatives to foster the
+ + + +
integration of immigrants
Initiatives to raise female labour
+ + + +
force participation
Initiatives to combat
+ + + +
discrimination

14. In the area of labour and product markets, the
equality effects depend on the precise measure.
Labour
Employment Earnings GDP per
A rise in: income
rate equality capita
equality
Minimum wage (relative to
0/- + ? 0/-
median wage)
Impact of policies
Unionization ? + + ?
Legal extensions of collective
- ? - -
wage agreements
The gap between protection on
- - - -
regular vs. temporary work
Product market regulation - 0/+ ? -

15. Many tax policies imply trade-offs with respect
to the growth and distribution objectives.
Disposable
GDP per
Revenue-neutral tax changes: income
capita
equality
Change tax mix from income to
- +
consumption tax
Change tax mix from income to real
Impact of policies
- +
estate tax
Change tax mix from income to wealth
? +
and inheritance tax
Increasing top PIT rates and tax free
+ ?
allowances
Cutting tax expenditures and marginal
+ +
rates

16. Contact information and underlying
documents.
Contact person
• Isabell Koske (Isabell.Koske@oecd.org)
Webpage
• www.oecd.org/economy/goingforgrowth/inequality.
Further information
Going for Growth 2012
• Reducing income inequality while boosting economic growth: can it
be done?, Chapter 5
OECD Economics Department Policy Notes Series
• Policy Note No. 8: Inequality in labour income – What are its drivers
and how can it be reduced?
• Policy Note No. 9: Income inequality and growth – The role of taxes
and transfers

17. OECD Economics Department Working
Paper Series
Working Paper Series on “Less income inequality and more growth –
Are they compatible? ”
• WP 924: Part 1. Mapping income inequality across the OECD
• WP 925: Part 2. The distribution of labour income
• WP 926: Part 3. Income redistribution via taxes and transfers across
Further information
OECD countries
• WP 927: Part 4. Top incomes
• WP 928: Part 5. Poverty in OECD countries
• WP 929: Part 6. The distribution of wealth
• WP 930: Part 7. The drivers of labour earnings inequality – An
analysis based on conditional and unconditional quantile regressions
• WP 931: Part 8. The drivers of labour income inequality – A review of
the recent literature