The Recession Made Income Inequality Even Worse


The gap between the rich and the poor across the world has grown faster since the financial crisis than it did during the entire decade before it, according to a new report from the Organisation for Economic Co-operation and Development (OECD). On top of that, inequality in earnings from work and investments increased as much during the first three years of the crisis as in the 12 years before it.

Today, the average income of the world’s richest 10 percent is now about 9.5 times what the poorest 10 percent make. A quarter century ago, that figure was just 7 times. Meanwhile, the Gini coefficient, which measures income inequality, increased from 0.29 percent in the mid-1980s to 0.32 in 2010.

These trends have been particularly pronounced in the United States. Here, 47 percent of total income growth between 1976 and 2007 went to the top 1 percent, one of the biggest increases among OECD countries. They earned 20 percent of total income in 2010, the highest share out of the 34 member countries. In 2012, the wealthiest 10 percent took home half of the country’s total income, the largest share ever recorded.

While things have been going well at the top, the opposite is true in the middle and at the bottom. The United States is one of a handful of countries where the share of income going to the middle class, or the middle three quintiles of the income distribution, has fallen over time. Relative poverty is also particularly high here, or the share of people whose income is less than half of the national median. Around 11 percent of the population in OECD countries lives in relative poverty, but in Chile, the U.S., and Japan, that share is between 16 and 18 percent. The share of people who work and still find themselves living in poverty is also high here, at more than 12 percent.

The report notes that income inequality, and in particularly the resulting inequality of opportunity stemming from unequal access to education, health care, and infrastructure, hurts economic growth. “Inequality is particularly likely to undermine growth if the income of the lower and middle-classes fall behind the rest,” it states, as it is in the U.S. Economists at the International Monetary Fund recently came to the same conclusion, finding, “Lower net inequality is robustly correlated with faster and more durable growth.” And at the same time they found that redistributive policies through taxes and income transfers that could address poverty won’t hurt economic growth, leaving room for the government to take action against inequality.

The OCED report notes that tax codes and public benefit programs used to do more to mitigate inequality: they offset more than half of the rise in inequality in pre-tax incomes up until the 1990s, but since then, they only reduced inequality by about a quarter. But it notes that even given the political unpopularity of raising taxes, there’s room to get more revenue from combating tax evasion and reducing tax expenditures on things that mostly help the wealthy.

But that’s not what the U.S. is doing. After the Great Depression, the New Deal helped to reverse the trend of growing income inequality in the years leading up to it. But as economists Emmanuel Saez and Thomas Piketty have noted, policy responses to the Great Recession haven’t been nearly so aggressive and “are modest relative to the policy changes that took place coming out of the Great Depression.” Other policies, on the other hand, have helped to increase inequality: the deregulation of Wall Street, changes in the tax code for capital gains income, and the shredding of the social safety net, which has been helping to keep the gap smaller than it would be otherwise.