Income inequality could worsen globally

Global income inequality could get worse, as well as social divisions, says a new OECD report. The authors warn that the problems could become entrenched unless swift action is taken by governments to encourage support for the most vulnerable in society.

The OECD (Organization for Economic Cooperation and Development) wrote in its study – Society at a Glance 2014 – that even though the global economy is on a gradual rebound, in many nations medium-term fiscal consolidation is set to pose major challenges for addressing the social fallout from the Great Recession.

During the early phases of the Great Recession spending on family, disability and unemployment benefits increased, but these areas are currently under the threat of cuts. Coverage has also become a serious challenge – in some cases social protection programs helped reduce the blow for millions of people, but others were left with either very little or no support; notably in the southern European nations.

Rising income inequality threatens future social cohesion

Before implementing any further cuts in expenditure, the OECD urges governments to think them through very carefully. By withdrawing support for the most vulnerable people in society, governments could be adding fuel to future social cohesion problems.

While it is crucial that governments succeed in restoring public finances and creating confidence, they must be careful this does not resulting in greater social gaps and inequalities.

OECD Secretary-General Angel Gurría, said:

The economic recovery alone will not be enough to heal the social divisions and help the hardest hit bounce back. Governments need to put in place more effective social policies to help their citizens deal with future crises. They also need to avoid complacency and persevere in their reform efforts as the recovery takes hold.”

Social spending must be aimed at the most needy

The OECD emphasizes that social spending and investment should be targeted at the most needy. It is important to avoid across-the-board cuts in social transfers. Housing, child and/or family benefits especially need to be protected, because they provide crucial support for lone parents and poor working families. Withdrawing such support now could eventually damage children’s development and people’s future chances of well-being.

Below are some highlights from the report:

  • The number of homes surviving with no income from work has doubled in Spain, Ireland and Greece, and increased by 20% in the US, Slovenia, Portugal, Latvia, Italy, and Estonia.
  • Poorer households have lost a greater proportion of their incomes than the better off.
  • Poorer households have benefited less in the recovery than the better off.
  • Younger people run a higher risk of falling into poverty today than before the Great Recession. In most countries, the proportion of 18 to 25-year-olds living in households with incomes below half the national average has increased; by 5 percentage points in Turkey, Spain and Estonia, by 4 points in the UK, and 3 points in Italy and Greece.

More people struggling to feed themselves today

The proportion of citizens saying they cannot afford to buy enough to eat rose in 23 nations, particularly in Hungary and Greece, but also in the US.

Women are having fewer babies, which will worsen the fiscal and demographic challenges of an aging population. In 2008, there were 1.75 children per woman; this has dropped to 1.7. From 2000 to 2008 the figure had increased.

The long-term health effects of the Great Recession have not been quantified in the report. However, it is well known that unemployment and financial hardship have a significantly negative effect on both physical and mental health.

Spending on education has fallen (relative to GDP) in half of the OECD nations since the beginning of the crisis. Cuts have been especially severe in the US, Switzerland, Sweden, Italy, Iceland, Hungary and Estonia.

The OECD added “By contrast, the large emerging-market economies have aimed to bolster redistribution measures as part of their strategies to reduce poverty and inequality and can learn from the recent experiences of OECD countries.”

Video – Income Inequality