Income inequality hurts economic growth

Cute alpacas learn about income inequality
Cute alpacas learn about income inequality

The gap between rich and poor is at its highest level in 30 years and countries need to sit up and take notice if they don't want it to hurt their economies.

A new report from the Organization of Economic Co-operation and Development, which represents 34 mostly developed nations, said the rise in income inequality hurts economic growth.

Today, the richest 10% of the population in member countries earn 9.5 times the income of the poorest 10%.

Other findings from the report:

It's bad for bottom 10% during bad times and good times: Incomes for the top earners in OECD countries have grown consistently in the last 30 years. However, incomes for the bottom 10% grew much slower during the prosperous years and fell during economic downturns.

Inequality damages some economies more than others: At the current rate, inequality is expected to reduce economic output for all these countries by a total of 8.5% in 25 years.

Rising inequality has done the most economic damage in Mexico and New Zealand, where economic growth per capita would have been up to 10 percentage points higher if incomes had been more equal during the past two decades.

In the United States, the economy lost between 6 and 7 percentage points of growth as a result of inequality over between 1999 and 2010.

Inequality hurts educational opportunity: One of the main reasons why income inequality hurts the economy is because it means much of the labor force cannot afford an education. That limits "social mobility" and undermines economic growth.

Redistributing wealth doesn't have to hurt the economy: The OECD said policies aimed at redistributing wealth through taxes and benefits doesn't hurt economic growth, assuming they are efficient and targeted. Governments need to focus on a broader group of people -- or the bottom 40% -- rather than the bottom 10% to achieve better results, the OECD recommends.

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