Rapid growth in income inequality threatens the world’s economic future as the skills gap increases in the West. Edward Balls reports from London
The scourge of inequality is back on the political agenda. Reports published over the past few weeks have highlighted the rapid growth in wage and income inequality and the threat this poses to our economic future.
The conservative idea that inequality is good for the economy is dead, but conservative solutions to deal with growing inequality live on.
The most shocking, if least surprising, contribution comes from the United Nations. Its Human Development Report has been publishing statistics and trends for years. They all remind us that rising inequality is a global problem. The simple fact is that the poorest 20% of the world’s population have seen their share of world income fall from 2,3% to 1,4% over the past 30 years.
Less shocking, but more significant, is the fact that the Organisation for Economic Co-operation and Development (OECD) has realised inequality is an economic blight.
The OECD has been at the forefront of free-market thinking over the past decade, proselytising about deregulated labour markets and lower benefits. But its latest Employment Outlook admits that the countries that have come closest to its prescriptions — the United States and the United Kingdom — have had the fastest growth in wage inequality of any OECD country.
In a rebuttal of the 1980s trickle-down idea that “a rising tide lifts all boats”, the OECD concludes that, far from benefiting the poor, inequality tends to increase poverty and social exclusion. Nor is it able to find evidence that countries experiencing more inequality tend to have better employment records. Indeed, the UK story since 1979 has been rising inequality alongside stagnant employment growth.
Meanwhile, the east Asian countries highlight the close relationship between equality, skills and growth. One recent study showed that the combination of greater income equality and high school-enrolment rates explains about 90% of the higher growth achieved by east Asian growth countries.
A revolution is under way, but it is not yet complete. While there may be a growing perception of the scale and dangers of inequality, conservative approaches to reversing it are still prevalent across the political divide.
The OECD, for example, still hankers after deep cuts in unemployment benefits — dismantling the welfare state remains the new-right orthodoxy on both sides of the Atlantic.
The progressive response too often takes the form of palliatives rather than solutions: hand-wringing pessimism about the scale of the challenge alongside calls to use the tax and benefit system to ameliorate the worst effects.
There is much more we can do. Global financial markets have not taken away the ability of government to use the tax and benefit system to redistribute income, as Britain’s conservatives have shown over the past 18 years. But changes in taxes and benefits have been the least important reason for the growth in inequality in the 1980s.
The growing gap in incomes and job chances between people with the skills demanded by employers and workers with no qualifications is the main cause of poverty and inequality across the developed world.
Two recent articles published by the London School of Economics’ Centre for Economic Performance and Oxford University’s Institute of Economics and Statistics help point the way down the radical path.
The first highlights the importance of skill-based technological change in driving this growth in inequality. But it also finds that the decline in trade union membership and collective bargaining is important in explaining wage inequality in Britain and the US. Skills, education and active trade unions lie at the heart of the problem and offer the key to a solution.
The findings of the second paper help point the way. It says that working in a unionised workplace in Britain makes it much more likely that people receive training — despite the fact that most trade unions do not yet bargain directly over training matters.