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How income inequality holds back economic growth

Wealth divide cost US roughly 7 percentage points of GDP growth from 1990 to 2010, OECD report finds

Rising income inequality has “a negative and statistically significant impact” on economic growth, according to a report released Tuesday by the Organization for Economic Cooperation and Development (OECD) that examined the link between wealth divide and GDP growth in member countries.

Out of the 21 OECD countries — which include much of Europe and the United States — 16 were found to have grown more unequal from the mid-1980s to 2012, using the economic measure known as the Gini coefficient. Authors of the report estimate that rising inequality had knocked more than 10 percentage points off Mexico’s GDP between 1990 and 2010. Over the same period, the U.S. economy was hit by roughly 7 percentage points, and the United Kingdom lost 9 points, according to the OECD study.

The figures were based on model using theoretical and empirical analysis.

“This compelling evidence proves that addressing high and growing inequality is critical to promote strong and sustained growth and needs to be at the center of the policy debate,” said OECD Secretary General Angel Gurría in a statement accompanying the release of the report. “Countries that promote equal opportunity for all from an early age are those that will grow and prosper.”

According to the report, inequality slows down GDP growth by “hindering human capital accumulation,” hurting educational outcomes and long-term economic prospects for those on the lower end of the income ladder. The OECD recommends checking against this tendency by investing in education.

The report also suggests that a more direct form of assistance may help to reduce inequality without harming economic growth. The OECD found that direct cash transfers don’t slow down GDP growth, “provided these policies are well designed and implemented.”

“Not only cash transfers, but also increasing access to public services, such as high-quality education, training, and health care, constitute long-term social investments to create greater equality of opportunities in the long run,” according to the report.

Other international organizations have sounded the alarm about global inequality in recent weeks. Last month, the World Economic Forum released a report, co-authored by United Nations adviser Amina Mohamed, which identified global inequality as the No. 1 trend to watch in 2015.

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