Last week I wrote about the need to search for a new economic model. I also wrote, that in the aftermath of a very severe international economic recession and a crisis in the financial markets, we need to start speaking of a reformed market economy. This crisis has brought about an impoverishment of certain countries, high unemployment and a diversion of public resources from growth-enhancing activities to fiscal consolidation.
Even in those countries that have done relatively well during difficult times, such as some of the emerging economies, and in those countries that have emerged from the recession such as the US economy and the UK economy, income inequality has reached record highs.
The Organisation for Economic Cooperation and Development has reported that in OECD countries, the richest 10 per cent of the population now earn 9.6 times the income of the poorest 10 per cent, up from 7:1 in the 1980s and 9:1 in the 2000s. Wealth is even more concentrated at the top than income, emphasising more the overall disadvantage of low-income households. In 2012, the bottom 40 per cent owned only three per cent of total household wealth in the 18 OECD countries with comparable data. By contrast, the top 10 per cent controlled half of all total household wealth and the wealthiest one per cent owned 18 per cent.
Can this state of affairs be allowed to continue? There are some who believe that increased income inequality makes people work harder and so is good for the economy. Is this so? The OECD claims that high inequality is bad for economic growth and that “by not addressing inequality, governments are cutting into the social fabric of their countries and hurting their long-term economic growth”.
The rise in inequality between 1985 and 2005 in the countries analysed by the OECD is estimated to have knocked 4.7 percentage points off cumulative growth between 1990 and 2010. Why is this so? It is inequality affecting the bottom 40 per cent which mainly brings down overall growth. As inequality rises, families with lower socio-economic background experience significant falls in educational attainment and skills, implying large amounts of wasted potential and lower social mobility.
The OECD claim confirms the view that we need to search for a new economic model, which takes account of this social requirement. Neither the communist system nor the free market system has the right answer to this issue.
Even in those countries where employment has increased, incomes have remained generally flat, and the growth in employment has been in the part-time or temporary or self-employed sector. Thus employees are today much more vulnerable than they were in the past. Youths are probably the most vulnerable segment. For example, in the OECD, half the temporary workers are aged less than 30 years. Such persons are less likely than other segments of the population to move from a temporary job to a permanent job. Youth unemployment in certain countries has hit the 50 per cent mark.
Female participation in the labour force has continued to increase... however, women are likely to earn some 15% less than men for the same job
Women are another segment that is suffering the consequences of this increased income inequality. Female participation in the labour force has continued to increase and as such today there is an increasing percentage of women who have an independent source of income. However, women are likely to earn some 15 per cent less than men for the same job.
Therefore it may seem evident that governments need to promote more gender equality and provide better access to jobs and education to reduce income inequality. But this cannot be enough. It probably requires a change in mindset. We have got used to the existence of income inequality and probably feel that the provision of welfare services will address this inequality.
Yet it is known that the provision of welfare services may actually induce people to lead all their life depending on such handouts. We cannot keep on thinking of welfare services as a means of simply addressing the injustices of the free market system. We must start to address income inequality in a different way and that requires a new economic model.