Michael Förster : "Income inequalities have reached a level not seen for the past 30 years"

Inequalities are increasing in almost all rich countries, according to an OECD report, Divided we stand : Why Inequality keeps rising. Michael Förster is a social and political analyst for the OECD and the main author of this report.

What are the main findings of this report ?

Recent changes in levels of income inequalities amongst OECD countries are a continuation of the trends we have seen since the beginning of the 1980s - the time when this rise began. The gap between the richest and poorest households continues to grow, even in more “egalitarian” countries such as Sweden.

This is the outcome of two phenomena. Towards the top of the income scale, there has been an increase in the wealth held by the richest 1% (and even more so amongst the richest 0.1%). This follows the trend of Anglo-Saxon countries, which is now becoming common in continental Europe. This increase in inequalities is accompanied by a reduction in tax rates over the sam [1] has reduced from 70 to 42% since 1980, and in the UK it has reduced from 80 to 40%. At the bottom of the income distribution, the increase in social benefits has generally been smaller than the rise of real wages.

The report presents evidence that the increase in inequalities of household income is essentially the reflection of the rising earnings inequalities. Greater concentration of capital income has also played a role in increasing inequalities, but its impact has not changed much as capital income explains 11% of overall inequality today compared to 8% 20 years ago. Lastly, in many OECD countries the role of social benefits and taxes in minimising inequalities has been weakened.

How does the situation in France differ from that in other countries ?

Inequalities in household income have been relatively stable in France since the mid 1980s, while on average inequality has increased in the vast majority of OECD countries. Thus whilst France had higher than average inequality in the mid 1980s, today inequality in France is slightly lower than average at the same level as Germany.

Inequalities in earnings were stable during this period because whilst the lowest salaries increased, the higher salaries stayed roughly at the same level relative to others. The number of hours worked changed very little, both at the top and bottom of the income scale. In other countries, the number of hours worked reduced disproportionately towards the bottom of the income scale. In addition, the large increase in the employment of women – the 4th biggest increase amongst OECD countries – permitted a more egalitarian distribution of household earnings. Finally, redistribution through social benefits and taxation reduced inequalities amongst the working population in France by 30%, compared to the average of 25% in the OECD overall.

However, this picture of overall stability over the long run hides the recent increase in income inequalities since the early 2000s, which followed a fall during the 1980s and 1990s. In other words, the reduction in inequalities between 1985 and 1995 has now almost been reversed. Benefits and taxes redistribute less today than five or ten years ago, a point that was also made in the “Social Portrait 2011” by L’Insee [2]. Another aspect of inequality in France is wealth : while income inequalities are slightly lower than the average for OECD countries, inequalities in the distribution of wealth seem to be much greater than elsewhere !

What are the main causes of the increase in income inequalities in the majority of OECD countries ?

Primarily, the development of new technologies (notably information technologies) has created considerable gaps in income between those who have access and those who do not, even if better access to education reduces the impact of this pattern. A large part of the labour market is closed to those who have not mastered how to use these new technologies.

It should be noted that the trade globalisation has not had a significant direct effect on inequality, contrary to popular opinion. Also, changes to family life, with the increase of single parent families and homogamy ("assortative mating"), has had quite a weak influence on inequality according to our report.

Reforms of product and labour market regulations introduced from the 1980s have had a double-sided effect. On one hand, these changes have allowed previously under-represented groups of people to enter the labour market. On the other hand, they have contributed to the increased wage dispersion. Lastly, although the volume of direct redistribution – benefits and taxes – has often increased, this has not been enough to compensate for the rise in market income inequality.

Amongst the causes of increased inequality, you speak of reforms to the labour market. However, the politics of greater labour market flexibility have been advocated by the OECD …

Yes, but it is important to put such recommendations in context. In the 1990s, the OECD defended greater labour market flexibility to facilitate job creation and the integration of previously excluded people, thus enabling a more equal distribution of incomes. There was the understanding that inequalities between households were mainly the result of an inequality in access to the labour market between the unemployed, the non-working and those benefitting from having a job. The politics of deregulation, which led to greater flexibility of work, therefore had the reduction of unemployment as their objective. By this measure, these politics have been a success.

However, the quality of jobs that were created in this way has not been taken into account : the larger opening of the labour market was accompanied by an increase in jobs that were insecure and atypical (part time, temporary contracts, etc.), leading to a growth in earnings inequalities… The problem comes from the fact that such policies were not sufficiently designed for the long term. Once they are in place, you need to know what type of jobs have been created, if they bring stability and good prospects or if, on the other hand, they worsen earnings inequalities. This is an area to explore in order to tackle inequalities. In France, the Revenu de solidarité active (RSA) which gives extra money to people on low wages, attempts to respond to this need by backing the creation of jobs whilst financially supporting people to whom work does not offer enough stability.

Today inequalities are widely researched, however few studies address the causes of this phenomenon. How would you explain this ?

There are many studies today about inequalities, but often studies focus on just one aspect of inequality. We have tried to analyse income inequality and its causes in a more holistic way. Economists are mainly concerned with the impact of technological progress or globalisation on changes in individual wage inequalities, whilst sociologists focus on how changes in families and societies relate to changes in household income inequalities. Even though it is impossible to model all of this, we have endeavoured to frame inequality in a way that allows us to take into account a wide variety of factors.

I would like to add that inequality is now receiving considerable attention. Notably, inequality is seen as being problematic in and of itself, and not simply because of its connection to poverty. Inequalities are an economic problem as soon as education and other forms of capital remain the property of a minority within society and this hugely reduces social mobility. Inequalities are equally a political problem, in the sense that they can erode social cohesion and drive voters to become more nationalistic. Around the world social movements are currently voicing the view that inequalities have led to a democratic deficit, and they call for researchers to engage more in this area in order to improve understandings of this phenomenon.


[1The marginal tax rate is the upper tax rate of a progressive tax. It is charged on the upper part of income, not on the income as a whole.

[2L’Insee is the National Institute of Statistics and Economic Studies in France. The Social Portrait is a document produced each year by L’Insee, it is available online.

Photo : OCDE © Tous droits réservés


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6 février 2012

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