UNITED NATIONS CONFERENCE ON TRADE AND DEVELOPMENT Trade and Development Board Sixty-first session Geneva, 15 26 September 2014 Item 3: High-level segment Tackling inequality through trade and development: A post-2015 challenge Speaker: ILO Monday, 15 September 2014 Not checked against delivery * * This statement is made available in the language and form in which it was received. The views expressed are those of the author and do not necessarily reflect the views of UNCTAD.
Reducing inequality for balanced and sustainable growth : a global perspective Sandra Polaski ILO Deputy Director-General for Policy 15 September 2014
Taking a first look: Income inequality remains high in many OECD countries, even after taxes and transfers. Gini index (at disposable income, post taxes and transfers)
A closer look: About half of EU countries and the US have seen an increase in the ratio of D9/D1 since the crisis Source: Global Wage Report 2014/5, forthcoming; ILO preliminary estimates based on EU-SILC and US PSID using equivalence scales. Total household income is before deduction of current transfers paid. Only households with at least one member of working age were considered.
Looking behind the outcomes: Where inequality is increasing, it comes mainly from the labour market: examples of Spain and the US Source: Global Wage Report 2014/5, forthcoming; ILO preliminary estimates based on EU-SILC and US PSID using equivalence scales. Total household income is before deduction of current transfers paid.
1949-01-01 1951-01-01 1953-01-01 1955-01-01 1957-01-01 1959-01-01 1961-01-01 1963-01-01 1965-01-01 1967-01-01 1969-01-01 1971-01-01 1973-01-01 1975-01-01 1977-01-01 1979-01-01 1981-01-01 1983-01-01 1985-01-01 1987-01-01 1989-01-01 1991-01-01 1993-01-01 1995-01-01 1997-01-01 1999-01-01 2001-01-01 2003-01-01 2005-01-01 2007-01-01 2009-01-01 2011-01-01 Functional distribution (labour share, 1980=100) Personal distribution (Gini, household income, 1980=100) Labour income share as a key determinant Aspiration and Reality of inequality: the United States 130.0 125.0 120.0 115.0 110.0 105.0 100.0 95.0 90.0 Labour income share and personal income distribution in the United States (1949-2012) Sources: BLS, Productivity and Costs tables for labour income share; Census, Table F4 for Gini index Note: All figures refer to indexes, with the base year of 1980 130.0 125.0 120.0 115.0 110.0 105.0 100.0 95.0 90.0 85.0 85.0 Labour share Gini (household income)
Labour income share as a key determinant Aspiration and Reality of inequality: the G20 countries Trends in income distribution: Labour income share, gross (market) and net income inequality in G20 countries (simple average) Base year=1990 Source: ILO staff estimates
Labour productivity has grown faster than wages, especially in the advanced G20 Productivity and wage index G20 advanced economies 120 Real wage index (base year = 1999) Labour productivity index (base year = 1999) 115 110 105 100 95 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 Source: ILO, forthcoming, Global Wage Report
The labour income share has fallen in all G20 countries, except Russia 0% -2-4 -6-8 -10-12 -14-16 -18 Advanced economies 1970 2013 % 5 0-5 -10-15 -20-25 -30 Emerging market and developing economies 1995-2012
Since the crisis, wage growth has been weak, especially in advanced G20 economies Trends in real average wages, 2006-2013 (year-to-year change, %) % 10.0 8.0 6.0 4.0 2.0 0.0-2.0 G20 G20 developing G20 developed 9.1 8.3 6.3 6.3 6.6 5.6 4.9 3.9 3.0 2.6 2.4 1.9 1.5 1.5 1.0 0.9 0.8 0.7 0.9 0.6-0.4 0.3 0.3-1.1 2006 2007 2008 2009 2010 2011 2012 2013 Source: ILO, forthcoming, Global Wage Report
Has the rising share of GDP going to capital increased investment? The case of the US Earnings per share (S&P 500) and investment in the United States, 2000=100 200 180 Earnings per share (S&P 500) Investment % of GDP (US) 160 140 120 100 80 60 40 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013
Investment gaps remain large at the global level as well as in advanced economies Gross fixed capital formation, 1980-2012 (% of GDP) 27 World High income: OECD 24 21 18 1980 1983 1986 1989 1992 1995 1998 2001 2004 2007 2010
Why does inequality matter? Aspiration and Reality A matter of values equity, decency and social solidarity Inequality is associated with higher crime rates and social and political tensions the quality and stability of life for all citizens Inequality dampens economic growth through several channels or feedback loops : Constrains aggregate demand: lower income groups spend more of their income Investment-led growth has limits without increased consumption and has not occurred since the crisis The risk of financial instability is increased when profits lead to financial speculation rather than investment in the real economy, as has been the case in recent years Contributes to global imbalances as domestic consumption constrained economies turn to export-led growth
Denmark Belgium France Italy Sweden Finland Austria Norway Hungary Luxembourg Germany Slovenia Czech Republic United Kingdom Greece New Zealand Spain Estonia Portugal Israel Canada Slovak Republic Ireland Switzerland Turkey Korea Australia United States The labour income share is also important for tax revenues: well over half of total revenues in nearly all OECD countries comes from labour taxes Tax revenues structure by main tax type, 2012 or latest available (percentage of total taxation) 100% 90% 80% 70% 60% 50% 40% 30% 20% 10% 0% Personal income Corporate income SSCs Property Good and services Other *Figures in bold indicate total tax revenues as a % of GDP.
With labour shares declining, efforts to raise government revenues have focused on heavier labour tax rates and value-added taxes on consumption(vat) Between 2010 and 2013, the following countries have increased taxation on: - Personal income: Australia; Austria; Belgium; Canada; Czech Republic; Denmark; Finland; France; Greece; Iceland; Ireland; Israel; Italy; Korea; Luxembourg; Netherlands; Portugal; Slovak Republic; Spain; United Kingdom; United States. - Social security contributions: Austria; Belgium; France; Greece; Iceland; Israel; Portugal; Slovak Republic; United Kingdom; United States - Good and services consumption: Austria; Belgium; Czech Republic; Denmark; Finland; France; Germany; Greece; Iceland; Ireland; Israel; Italy; Luxembourg; Netherlands; New Zealand; Portugal; Slovak Republic; Slovenia; Spain; Switzerland; United Kingdom; United States.
Where do we stand now? Aspiration and Reality The risk of secular stagnation, affecting growth rates in both advanced and developing economies, is very real. Shortfalls in aggregate demand remain substantial at the global level and in most countries and these shortfalls are driven by weak household consumption, which is aggravated by inequality. Deflation is present risk in the EU and Japan, with global consequences and wage stagnation or declines is a main contributor.
How do we move forward? First, on the primary distribution: labour income 80% 70 60 50 40 30 20 10 0 17.1 19.2 19.5 Minimum relative to average wage in 2012 (percentage) 27.2 31.5 33.3 34.3 34.5 34.9 34.9 38.4 38.8 39.6 41.4 44.0 49.8 63.2 Change in minimum relative to average wage in 2007-12 (percentage point change) 8 % 6 4-2 02-4 -6-8 -2.2 0.8 2.5 3.7-3.9 3.5 0.3 4.0-1.1-1.1 0.5 0.6 3.5 4.8-1.5 0.3 3.1 Note: (2007-)2010 for Argentina, China, India and Indonesia, and (2007-)2011 for Brazil, the Russian Federation and South Africa. Source: ILO, OECD and World Bank (2014)
Then, on the secondary distribution: income taxes Improve the progressivity of personal income tax rates: many countries tax systems have become more regressive in recent years. Corporate taxation: Avoid the race to the bottom in corporate tax rates Participate in international coordination across advanced and emerging economies to avoid tax evasion and base erosion Encourage the G20 to play its full role as a coordinator of international economic policy Improve income tax collection of both personal and corporate taxes, close loopholes/offshore tax abuse. In some advanced economies, further increases in social security contributions may have adverse effects on hiring. But in most emerging and developing economies, gradually establishing sound social insurance plans for pensions, unemployment and compensation for workplace injuries through payroll taxes is an appropriate next step.
The secondary distribution, continued: consumption taxes Consumption taxes At a time when consumption is lagging in most economies, placing the tax burden on consumption rather than income requires careful thought. Value-added taxes (VAT) on consumption are inherently regressive If chosen, it is important to address the negative impact on equity through measures to make them less regressive. VAT exemptions: can impose a high administrative burden VAT rebates or direct transfers based on income may be more efficient.
The secondary distribution, continued: other taxes Other potential sources of revenue but requiring strong international cooperation: Carbon pricing taxes combined with reduced subsidies to extraction-based industries Property taxes Expansion of financial sector transaction taxes
The secondary distribution: transfers Social protection transfers have increased in many developing countries, but with wide variations Trends in total government expenditure and social protection expenditure per capita (2009-2011) Source: ILO 2014, World Social Protection Report 2014/5, Figure 6.5
New generation of inequality research Aspiration and Reality ILO and UNCTAD studies have been a leading voice ILO Global Wage Report 2014/15, forthcoming in November ILO World of Work Report 2014 ILO World Social Protection Report 2014/15 UNCTAD s Trade and Development Report 2014 IMF and OECD research OECD: On average, an increase in income inequality by 1 Gini point lowers yearly GDP per capita growth by around 0.2 percentage points -- Income inequality Update, June 2014. IMF: Lower net inequality is robustly correlated with faster and more durable growth -- Redistribution, inequality, and growth, Ostry, J.D, Berg, A, & Tsangarides, C.G. IMF Staff Discussion Note, SDN/14/02, 2014.