Being ‘in it together’. Sharing the burden. Putting the shoulder to the wheel. Pulling on the green jersey. In Ireland and elsewhere, these are among the euphemisms that have entered the lexicon of politicos in the age of austerity.
At the same time, of course, such exhortations to shared sacrifice have not always been supported by fiscal principles that see the burden matching means. In fact, austerity budgets have often hit the poorest hardest. The UK Chancellor’s recent ‘budget for working people’ was nothing of the kind: slashing working tax credits while cutting tax on corporations and hefty inheritances. Sometimes, inequality happens by accident. Sometimes it’s a matter of policy. By the same token, public policy can make things better – for everyone. It doesn’t have to be a zero sum game.
In May, the OECD launched the third instalment in its inequality trilogy: In it together: why less inequality benefits all. This tome builds on earlier work, 2008’s Growing Unequal?, and its 2011 sequel, Divided we stand. Even the IMF has been getting in on the act, publishing work last year on the links between inequality, redistribution and growth. In short, lower inequality is linked to stronger and more sustainable economic growth, while redistribution doesn’t reduce it.
This research also taps into a zeitgeist. President Obama has called inequality the ‘defining challenge of our time’. Thomas Piketty has achieved academic super-stardom with the publication of Capital in the 21st Century. And Occupy Wall Street, Spain’s Indignados, and the rise of radicals like Podemos and Syriza, across Europe have signalled inequality to be more than a passing political fad.
Rising inequality has been an entrenched trend for decades across the developed world, and it has accelerated since the global financial crisis. The richest 10% of the population now earn, on average, nearly ten times the income of the poorest 10% – up from 7 times in the 1980s. The unequal distribution of wealth is even more extreme. This not only saps social cohesion, it undermines economic growth too. The OECD’s research finds that the rise in income inequality alone was responsible for knocking 4.7% off cumulative growth between 1985 and 2005.
So, why does rising inequality harm growth? Part of the reason is to do with education. Socio-economic background has always been an important determinant of educational attainment. In the modern economy, skills have become an increasingly important ingredient for success. But your socio-economic background has become an even bigger determinant of the likelihood that you can access the quality education you need.
One of the key insights of the OECD’s work is that this ‘education effect’ of inequality on growth has much less to do with the fact that the top 1% are pulling away from the rest than it has to do with the bottom 40% falling further behind. Education can be a great leveller, but ordinary working people face higher barriers, financial and otherwise, in seizing the opportunity. So, rising inequality means that social mobility is lower, economic growth is slower, individual potential is wasted, and everyone is worse off.
Another driver of inequality has been the increasing prevalence of ‘non-standard’ work – fixed contracts, zero hours contracts and enforced part-time work, for example. For the lucky few, such arrangements can increase flexibility around working time and allow people balance work and other commitments to suit themselves. Speaking from personal experience, internships can be a spring-board to fulfilling full-time work. For the unfortunate many, however, non-standard work means less income, less security, and less training opportunities. Worse still, it can be a trap from which escape can be difficult – rather than the hoped-for stepping-stone to something better.
Meaningful employment can be a social elevator. One area in which huge advances have been made is in the area of women working. Women are working more and earning more than ever before. Without these advances, economic growth would have been even slower, and inequality even higher. Of course, there is much more to be done. Women still earn, on average, 15% less than men and are 16% less likely to be in employment at all.
Where you come from should never determine how far you can go. Neither class nor gender should impose a glass ceiling. The evidence is mounting, however, that we can’t have a truly level playing field if lots of the players are stuck in the mud. We need to tackle inequalities in outcomes head on if we are to truly ensure equality of opportunity. To this end, In it Together identifies four policy pillars:
1. Increasing women’s participation in economic life.
2. Promoting more and better jobs.
3. Investing in education and skills.
4. Redistributing resources through taxes and transfers.
With the clock ticking until Ireland’s next general election, I intend to come back to some of their policy implications in future articles.