Widening income gaps cost the Israeli economy more than NIS 55 billion in recent decades, according to a study published two days ago by the Organization for Economic Cooperation and Development (OECD). The authors of the study believe that per capita GDP in Israel would have been 6.3% higher (in 2010 terms) had social gaps in Israel remained at their 1985 level, instead of widening dramatically. The difference in per capita GDP would have been $1,673. The figures were disclosed to "Globes" in answer to a question, following the reverberations from the report published early this week, showing a negative link between higher inequality in people's income and productivity and growth in that country.
Economic research has dealt extensively in recent decades with the question of whether inequality is good or bad for economic growth. While contradictory theoretical answers have been given to the question, empirical research has not been able to show a clear connection between growth and inequality, due to methodological problems. The new OECD study, based on different methodology than that previously used, professes to provide the proof that was hitherto lacking, and even to quantify the effect of inequality on a country's economic growth.
"The empirical findings show that inequality has a negative effect on growth," the study authors write, and emphasize that the effect is "significant." For the sake of emphasis, the study authors claim that a reduction of one point on the Gini inequality index in a given country will be translated into 0.8% growth in that country over the five years following the reduction (0.15% each year).
Israel is conspicuously bad
Inequality in OECD countries has noticeably risen in in recent decades: the income of the upper income decile in the developed countries is currently 9.5 times the income in the bottom decile in those countries, compared with a 7:1 ratio in 1980. Israel is conspicuously bad in this trend. Israel's Gini index rating is 0.38, lower only than the rating of Mexico and the US on the list of the 18 leading OECD economies. The rate of increase in inequality in 1985-2010 was among the highest in the OECD (more than five base points). The report authors cite Israel explicitly as one of the first countries in which the problem of inequality occurred, together with the UK and the US. Inequality in Israel, the English-speaking countries, Germany, and Sweden featured accelerated income growth among the top income decile in the past 20-25 years.
In the table supporting their thesis, the researchers state that the expansion of income gaps in Mexico and New Zealand in 1985-2005 cost those countries 10% of GDP. They add that the growth rates in 1990-2010 in the US, UK, and the Scandinavian countries would have been a fifth higher "had the income gaps not widened." On the other hand, per capita GDP rose in countries such as Ireland and Spain during those years, among other things because of the relative equality prevailing there.
Israel, which joined the OECD in 2010, does not appear in the table, due to the absence of data from the early 1990s, the study authors told "Globes." Nevertheless, one of the authors said, "The effect of inequality in Israel can be estimated at 6.3%. In other words, the cumulative change in per capital GDP could have been 6.3% greater in 1990-2010, had inequality not grown in 1985-2005."
Published by Globes [online], Israel business news - www.globes-online.com - on December 10, 2014
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