INCOME INEQUALITY UPDATE INCLUSIVE GROWTH Centre for Opportunity November 2016 http://oe.cd/idd COPE and Equality Key Facts The fruits of the economic recovery have not been evenly shared 1 So far, the economic recovery has not reduced inequality Gini coefficient of disposable income inequality in 2007 - 14 (or latest year), total population 2014 or latest year (↗) 2010 2007 0.50 0.45 0.40 0.35 0.30 0.25 0.20 Note: Income definitions and data years: see Table 1. 2 Household disposable incomes are still below Labour market improvements have not pre-crisis levels, especially for the least well off benefited all households equally Real disposable income growth 2007 - 14 (or latest year) by income group, Total population, OECD average 2007-2010 2010-2014 2007-2014 4% 2.3% 2% 1.1% 1.3% 0% -2% -2.1% -4% -3.6% -6% -5.3% Bottom 10% Mean Income Top 10% Note: Data years: see Table 1. 3 Since 2010, labour incomes increased less at the bottom of the income distribution Panel A - Real labour income Panel B – Annual average real labour income growth, 2010 – 2014 (or latest year), growth 2007 – 14, Working-age population Working-age population, OECD 2007 to 2010 2010 to 2014 2007 to 2014 Mean (↗) Bottom 10% Top 10% 15% 10% 10% 5% 5% 0% 0% -5% -5% -10% -10% -15% -15% -20% -25% -20% Bottom Mean Top 10% 10% Notes: Labour incomes correspond to gross wages and salaries, and self-employment incomes. Data years: see Table 1. Redistribution dampened the increase in market income inequality but has weakened recently 4 Until recently, market income inequality rose faster than disposable income inequality Inequality before and after redistribution though transfers and taxes, respectively, 2007=100, Working-age population, OECD average Market income inequality (before transfers and taxes) Gross income inequality (after transfers and before taxes) Disposable income inequality (after transfers and taxes) 108 106 104 102 100 98 96 2007 2008 2009 2010 2011 2012 2013 Notes: OECD average excludes Hungary, Korea, Mexico, Turkey and Switzerland. Secretariat estimates for gross income inequality prior to 2011. 5 Redistribution decreased in a majority of countries since 2010 Percentage reduction of market income inequality due to transfers and taxes, 2007 - 14 (or latest year), working-age population Notes: Redistribution is defined as the difference between market income and disposable income inequality, expressed as a percentage of market income inequality. Market incomes are net of taxes in Hungary, Mexico and Turkey. Data years: see Table 1. 6 Taxes are back at their pre-crisis levels while transfers stagnate at high level in 2013 Change in real average market and disposable income, public cash transfers and taxes, 2007=100, Working-age population, OECD average Market income Public cash transfers Personal income taxes Disposable income 120 115 110 105 100 95 90 2007 2008 2009 2010 2011 2012 2013 Notes: The figures correspond to the changes in real terms of the mean of each component since 2007. OECD average excludes Hungary, Mexico, Switzerland and Turkey. Contacts Notes Social Policy Division, OECD Directorate for Employment, Labour and Social Affairs ↗ ↘ [email protected] +33 1 45 24 92 80 [email protected] +33 1 45 24 92 85 Household Statistics and Progress Measurement Division, OECD Statistics Directorate [email protected] +33 1 45 24 87 48 [email protected] +33 1 45 24 94 36 Further reading Useful links Source Box 1. The OECD Income Distribution Database (IDD - at http://oe.cd/idd) To benchmark and monitor income inequality and poverty across countries, the OECD relies on a database based on national sources (household surveys and administrative records) and on common definitions. Indicators are based on the concept of “equivalised household disposable income”, i.e. the total market income received by all household members (gross earnings, self-employment income, capital income), plus the current cash transfers they receive, less income and wealth taxes, social security contributions and current transfers that they pay to other households. Household income is adjusted with an equivalence scale that divides total household income by the square root of household size. Standard concepts and definitions of household incomes are provided by the Canberra Group Handbook on Household Income Statistics (United Nations, 2011). In 2015, the OECD changed its standard definition of household income. The revision goes in the direction of bringing the OECD income definition closer to the “operational definition” recommended by the 2011 Canberra Group Handbook. Key changes in the new definition include: i) the inclusion of the value of goods produced by households for their own consumption, as an element of self-employed income; and ii) the deduction of current transfers paid by households to non-profit institutions and other households (e.g. alimonies). As a result, current transfers paid by households now distinguish among: i) taxes on income and wealth and social security contributions paid by workers; ii) contributions to employment-related occupational schemes; and iii) current transfers paid by households to non-profit institutions and other households. In addition, a more detailed breakdown of current transfers received by households was implemented. This distinguishes among transfers received from: i) social security schemes; ii) employment-related occupational schemes; and iii) other households and non-profit institutions. This change allows more fine-grained measures of redistribution by distinguishing between “primary income” (income from work and capital and net transfers from other households), “market income”( primary income plus transfers received from employment-related schemes), “gross income” (market income, plus transfers received from social security schemes, less transfers paid to employment-related occupational schemes) and “disposable income” (gross income less taxes and other current transfers paid). Current transfers paid by households to non-profit institutions and other households, which were previously included in “capital income”, are now separately identified as a component of “current transfers paid by households”. While the new income definition implies a break in OECD historical series (data based on both the old and new definition are shown separately in OECD.Stat), data are available for at least one common year (typically either 2011 or 2012) based on both definitions. The pre-2011 data described in this brief have been corrected for this break. The corrected values proved to be significantly different from original values only in a handful of countries (notably Chile and Israel) and very limited or insignificant in the others. The inclusion of the value of goods produced by households for own consumption provides the basis for the progressive integration in the OECD database of estimates for selected middle-income countries, where subsistence agriculture accounts for a significant share of household economic resources. In most OECD countries for which information is available, the value of goods produced by households for own consumption is generally below 1% of household income but much higher in Mexico, where it accounts for 4% of household income (see Table 1). This income item is also more important for low-income households. The inclusion of goods produced by households for their own consumption lowers both income inequality and the proportion of people falling below the poverty-threshold. In Mexico, the ratio between the income received by people in the highest quintile to that received by those in the lowest one decreases from 13.7 to 11.5 in 2012; the Gini coefficient for disposable income falls from 0.482 to 0.457 and the share of people below the poverty line, from 21.4% to 18.9% (although these changes also reflect methodological changes introduced by the statistical office to measure income at the bottom of the income scale). The effect on inequality and poverty measures is smaller in all other countries. 7 Importance of goods produced by households for their own consumption among the entire population and the lowest quintile of the income distribution Percentage of household disposable income Total (↗) Lowest quintile 7% 5% 3% 1% -1% Note: Data on the value of goods produced by households for their own consumption are not available for Australia, Austria, Belgium, Canada, Denmark, Finland, France, Germany, Iceland, Israel, Korea, Japan, the Netherlands, New Zealand, Norway, Sweden, Switzerland, the United Kingdom and the United States. Database managers: [email protected], [email protected] and [email protected]. Table 1. Key indicators on the distribution of household disposable income and poverty, 2007, 2012 and 2014 or most recent year Poverty rate (threshold Income share in total income Poverty rate (relative threshold) "anchored" in 2005) Gini coefficient S80/S20 income share ratio Bottom Bottom Bottom Top Top Top Total By age group, 2014 or latest Total 10% 20% 40% 40% 20% 10% 2014 or 2014 or 2014 or Children Youth Adult Elderly Working 2014 or 2007 2012 2007 2012 2014 or latest (%) 2007 2012 2007 2012 latest latest latest (< 18) (18-25) (26-65) (> 65) poor latest Australia 0.338 e 0.326 0.337 5.8 e 5.5 5.7 2.8 7.2 19.4 63.7 40.9 26.1 14.9 e 14.0 12.8 13.0 8.0 10.6 25.7 4.8 .. 8.2 7.1 Austria 0.285 0.276 0.280 4.4 4.3 4.2 3.3 8.7 22.6 59.5 36.7 22.5 9.8 9.6 9.0 10.2 10.4 8.1 9.7 7.3 9.8 9.3 8.4 Belgium 0.280 0.268 0.268 4.2 4.0 4.0 3.6 8.8 22.5 58.9 35.2 20.6 9.5