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The socially inclusive imperative: new growth to restore global economic resilience

Roberto Martínez Yllescas. Especialista en políticas públicas y competitividad de la OCDE

Roberto Martínez Yllescas. OECD specialist in public policy and competitiveness

After realizing that the world has gone through the worst economic crisis since the Great Recession of 1929, conventional formulas of economic recovery -from a perspective dominated by macro-financial canon- suffer a corresponding crisis of credibility. This, in turn, translates into a growing scepticism about market equality and the rationality that sustains them. The consequences of the lacklustre growth of the last five years also leads to rethinking the foundations of the social pact that supports the foundation of the historically most robust economies in the West. Endemic unemployment, inequality and the accelerated erosion of confidence in the efficiency of economic institutions are only a symptom of a deeper dilemma between equity and growth.

Whether it comes as a surprise or not, in most countries, the gap between rich and poor is at its highest level for 30 years. Today, in the OECD countries, the richest 10% of everyone earns 9.6 times the income of the poorest 10%. In the early 1980s, this rate stood at 7:1 arriving at 8: 1 in the early 1990s and 9:1 in the 2000s.

In the United States, the richest 1% received 47% of the growth in total income in the economy between 1976 and 2007, compared with 37% in Canada and about 20% in Australia and Britain. The gap between rich and poor has widened even faster since the financial crisis. Without prejudice to stressing that this lesson has already been assimilated into the experience of emerging economies, particularly those in Latin America, and in Mexico, Brazil and Argentina. Few suspected that the same pattern would be extrapolated to the more industrialized economies, in the Internet age.

Moreover, this lesson then leads to review of new empirical evidence, the dynamics behind the phenomenon of growth. Thus, the evidence confirms that the increasing inequality in income distribution is a powerful inhibitor of growth, as the latest OECD research concludes.

This research shows that increasing economic inequality harms long-term growth. For example, it is estimated that the increase in income inequality between 1985 and 2005 has reduced the cumulative growth between 1990 and 2010 by 4.7 percentage points on average among the OECD countries for which data are available. The key factor is the growing income gap between low-income households -40% of the distribution- and the rest of everyone else.

This, the same in Mexico than in New Zealand, during the past two decades. In Italy, the United Kingdom and the United States, the accumulated growth would have been six to nine percentage points higher than observed, if the increase in inequality had been controlled. Inequality declined, for example, in Spain in the years before the crisis, which allowed it access to higher growth rates. However, then it increased sharply between 2007 and 2011, but has experienced a setback in 2012.

Poverty, which goes hand-in-hand with inequality, increased until 2011 and decreased in the past year in this country. However, when considering poverty by taking income before the crisis, this has also increased significantly and Spain is well above the OECD average. The age profile of the poor has also changed, with a significant deterioration of the situation of children and young people who have replaced older people as the age group most at risk of poverty. The causation linking inequality, poverty and a lower ability to produce long-term economic growth is explained largely by the fact that inequality has a dynamic such that erodes human capital from the root, by depriving educational opportunities the low-income population and therefore the skills demanded by the labour market to sustain economic activity based on increasing rates of productivity and competitiveness.

Meanwhile, the economic crisis in Spain, as in other European countries, has revealed how disruptive it can be: this explains a sharp fall in employment; which explains 6 of the 8 points increase in income inequality of households. In particular, the relationship between the collapse of the Spanish employment during the crisis and the increase in inequality and poverty is explained by the prevalence of non-standard employment -the temporary contracts or part-time work and the self-employment-. Everyone employed under this type of contract in Spain accounts for just over 40 percent of the workforce and increases to 60% among young employees aged between 15 and 29 years.

Non-standard work can be a "springboard" for more stable employment, but it depends on the type of work and the characteristics of workers and labour market institutions. In many countries, younger workers, especially those with only temporary work contracts, are less likely to move to a more stable job or career. The problem of non-standard employment is most often still a provisional workforce: only 20 percent of those who take these jobs access a full-time permanent job three years later.

Additionally, the rate of households reporting income from non-standard employment and that are also at risk of poverty is 31 percent - significantly above the OECD average of 22 percent. This means that a chain of transmission of inequality in Spain is the prevalence of low-quality employment, which in turn produces a model of labour employability which is unqualified and impoverished.

In contrast, from the standpoint of public policy, the recourse of subsidies or transfers contribute little to competitiveness, and also fell sharply in the countries hardest hit by the crisis, such as Spain. For the revival of growth on a more sustainable level, it is more important to maintain the provision of educational services of higher quality, with better training services to develop job skills compatible with productive and better paying jobs. Not before time, the key becomes the increase in female participation in the workforce, which is consistent with a greater effort to reduce gender disparities and income on educational outcomes and the transition of young people into formal employment.

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