Increased inequality could explain productivity problems, OECD suggests

31 May 16

Rising inequality around the world could be connected to too-slow productivity growth, which has been a cause of concern for economists globally since before the financial crisis, the OECD has said.



Inequality protests

People protest against inequality.


An OECD report, titled the Productivity-Inclusiveness Nexus, published today, found that inequalities of wealth, income and wellbeing have common foundations with low productivity, and in turn further undercut economies’ productive potential.

Gabriela Ramos, special counsellor to the OECD secretary-general, chief of staff and Sherpa to the G20 at the OECD, led the work behind the report. She said tackling this nexus of challenges will require a “new, coherent and multidimensional policy approach”.

“A new... approach is needed in order to ensure that all individuals, firms and regions can realise their potential and share in the benefits of improved productivity growth,” she said. “In practice, this will call for measures that aim to help people, businesses and regions lagging behind.”

In particular, the report stresses the need to expand the productive assets in an economy by investing in the skills of people and building an environment where all firms have a chance to succeed, even in regions that have fallen behind.

Unlike another report released last week by the OECD on productivity, today’s suggested that the failure to translate rapid technological change into productivity growth is likely the result of a mixture of cyclical and structural factors.

For example, weak global demand has led to persistently low investment in physical capital – a cyclical phenomenon.

However other factors are structural. For instance, a lack of competition in certain markets may on the one hand have allowed poorly performing firms to linger, trapping valuable human and capital resources in unproductive activities and entrenching inequalities of income, while on the other increasing leading firms market power and raising barriers to entry.

The report highlights that at the same time as sluggish productivity growth, inequalities have increased in the majority of countries, with low-income groups and regions that have fallen behind tending to accumulate economic and social disadvantages.

Higher inequality results in fewer people in the bottom 40% of the population investing in skills, thereby worsening inequality and reducing productivity growth.

A growing productivity gap between leading firms and other companies that are lagging behind has also further exacerbated rising inequality, with the OECD stating it appears to have contributed to a widening of wage distribution over the past two or three decades.

To tackle these interconnected challenges, the OECD recommends wide-ranging and complementary policy approaches.

For example, better matching of skills to the needs of the labour market and the provision of lifelong learning and training opportunities are “part of the solution”, it said.

However it also noted the key role for regions and cities by adapting policies to the specific needs of local communities. Housing and transport policies for example can also be key in helping disadvantaged groups access training and jobs.

“The report highlights the need to break up traditional policy ‘silos’ and pursue cross-cutting institutional reform to encourage a coherent and complementary approach to policymaking,” the OECD said.

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