OECD research challenges the concept of trickle-down economics

10 December 2014

The Organisation for Economic Cooperation and Development (OECD) have published a report which shows that increases in income inequality are linked to falls in economic growth. This challenges the notion that policies which encourage wealth creation produce a ‘trickle-down effect’ which benefits low-income groups.

The report ‘Focus on Inequality and Growth – December 2014’ found that ‘The biggest factor for the impact of inequality on growth is the gap between lower income households and the rest of the population. The negative effect is not just for the poorest income decile but all of those in the bottom four deciles of the income distribution. These findings imply that policy must not (just) be about tackling poverty, it also needs to be about addressing lower incomes more generally’.

It also found that the gap between rich and poor across most OECD countries is the highest it has ever been in 30 years.

The report proposed higher taxes on the richest 10 per cent, who now earn 9.5 times the income of the poorest 10 per cent. It also stated that ‘policymakers need to be concerned about the bottom 40% more generally – including the vulnerable lower-middle classes at risk of failing to benefit from the recovery and future growth’.

The guardian reported that ‘According to the OECD, rising inequality in the two decades after 1985 shaved nine percentage points off UK growth between 1990 and 2000. The economy expanded by 40% during the 1990s and 2000s but would have grown by almost 50% had inequality not risen. Reducing income inequality in Britain to the level of France would increase growth by nearly 0.3 percentage points over a 25-year period, with a cumulated gain in GDP at the end of the period in excess of 7%.’