What does inequality mean for global organizations

For businesses, systemic inequality is a great source of risk. It limits productivity and has the potential to constrain consumer spending and growth, destabilize supply chains, trigger political instability, and jeopardize their social license to operate. At the same time, addressing inequity is a business opportunity.

But, with many businesses now dwarfing governments in economic scale, the private sector has a vital role to play in tackling inequality. In the quest for a peaceful and prosperous future, the United Nations Sustainable Development Goals (SDGs) call for cooperation between governments, civil society and the private sector.

Corporate leaders increasingly recognize how systemic social inequality negatively impacts the world around them, in addition to understanding how it can harm culture and productivity within the walls of their own businesses. Inequality puts companies at risk of legal, moral, and economic factors:

It is a great pleasure for me to be here at the 2013 ‘Trento Festival of Economics’. The fact that this is the 8th edition of this Festival projects its great relevance. This year’s topic, “Sovereignty in conflict” is provocative. But it is a crucial topic in this world in which the role of governments is becoming more complex. I welcome this opportunity to share with you our views on global inequalities and how they can be addressed.

Yesterday, we concluded our annual OECD Week comprising the OECD Forum and the Ministerial Council Meeting (MCM) in Paris. The theme we focused on this year was: “It’s all about people – Jobs, Equality and Trust”. I am happy that one of our most important policy challenges – the widespread phenomenon of rising inequality – is squarely back on policymakers’ agenda.

The threatening growth of inequalities

Let me start with some facts on this very delicate issue. Over the past two decades, the OECD has carefully documented the evolution of income inequality. In 2008, we highlighted the rising inequality trend in our publication “Growing Unequal?”. At that time, the title still carried a question mark; we unfortunately had to drop it when we published our 2011 study “Divided We Stand”. This study indeed confirmed growing inequalities and identified the main drivers behind these trends.

Let me first share with you some striking facts:
•    Income inequality increased in the first three years of the crisis, between 2007 and 2010, by more than it had in the previous twelve years.
•    In 2010, the richest 10% of the population in OECD countries earned about 9 times the income of the poorest 10% - 25 years ago, this ratio was only 7 to 1.
•    And even for those countries where inequalities have decreased, like Chile and Mexico, the ratio is 27 to 1. Here in Italy the inequality ratio stands at 10 to 1.

Why has this happened?

Untangling the complex factors behind the widespread increase of income inequality is what will ultimately lead us to reversing this trend. Let me highlight four factors that we consider crucial in explaining this phenomenon:

1.    The single most important driver has been greater inequality in wages. This is no surprise, among the working-age population in most OECD countries, earnings from work make up about three-quarters of total household incomes.

2.    Globalisation, technological changes and policy reforms have also driven profound labour market transformations in all our countries. Relatively high-skilled workers have enjoyed significant earnings and income gains, while workers with low or no skills have been left behind.

3.    Policy and regulatory reforms have also affected labour markets. By promoting productivity and economic growth, these reforms have brought more people into work, and in particular many women and low-paid workers. This led to a rise in part-time and low-paid workers, thus widening the distribution of wages.

4.    Last but not least, tax-benefit systems have become less effective at redistributing incomes. The main reason is found on the benefit side: levels were cut and eligibility rules tightened to contain social spending. Transfers to the lowest income groups thus failed to keep pace with earnings growth.
Once we have identified the roots of the problem, we can ask the next question: How do we reverse this trend?

Reversing the trend: Towards a level playing field

Today, more than ever, the key to reversing this inequality trend lies clearly in improving the employment situation. Unemployment during the crisis has reached unprecedented levels. We currently have close to 49 million people unemployed in the OECD area, nearly 14 million more than before the crisis. The young have been particularly affected with 16.5% of them out of work in the OECD.  This rate even surpasses 50% in countries such as Greece and Spain. Look at Italy: your unemployment rate is 11.5%, while youth unemployment currently stands at 38.4%!

We need to urgently focus on creating more and better jobs and on offering real career prospects for these youth. We must, for example, focus on up-skilling the workforce and removing barriers to higher labour force participation of women; thereby strengthening gender equality.

The provision of public services such as education and health is also essential in reducing inequality. Improving the quality of these services is therefore crucial. With PISA, the OECD provides a powerful tool to assess the quality of education and the experience of 34 OECD member states and 37 partner countries to improve on it.

The reform of tax and benefit policies is also central to our goals. Over the last two decades, many countries moved away from highly progressive income tax rates and net wealth taxes. Viable and effective policy avenues do exist, such as: raising marginal tax rates on the highest income brackets; improving tax compliance; eliminating tax exemptions; and reassessing the role of property and wealth taxes.

The OECD’s contribution: Putting people first!

The OECD is actively engaged in supporting its member and partner countries in addressing the high levels of inequality and promoting equality of opportunities. Last week our Ministerial endorsed a Youth Action Plan. It contains concrete actions to increase job opportunities and the employability of youth, by improving education, vocational education and training systems, as well as ensuring better transition from school to work.

We are developing a Strategy for Inclusive Growth, which focuses not only on income and wealth, but also on non-monetary dimensions of economic growth such as jobs, education, health, social connections, civic engagement and institutions.

We are also focusing on Gender Equality. Last year we launched our report on “Closing the Gender Gap: Act Now!”. This Report identifies the main trends behind gender gaps and provides policy options to close them. And during our Ministerial last week we adopted a Recommendation on Gender Equality focusing on education, family-friendly policies and increasing women’s representation in decision-making positions amongst other issues. We will from now monitor progress.

Lastly, let me highlight an ambitious, multifaceted initiative which we have embarked on called “New Approaches to Economic Challenges” (NAEC). This project aims to draw lessons from the crisis and upgrade our analytical frameworks while looking for new approaches to better address economic and social challenges, including and even primarily this growing inequality.

Ladies and Gentlemen:

Inequalities are threatening the viability of our economies and eroding social trust. People are increasingly calling into question the strength of the “social compact”. Re-igniting growth and putting people back to work is our utmost priority, but this has to be implemented and achieved in a sustainable and inclusive manner. To achieve this, we must ensure that the young receive the job security they deserve; that our fiscal policies ensure that everyone is paying their fair share; that gender equality in the workplace is never questioned; and that the benefits of economic growth do trickle down!

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