Is the OECD right that inequality has significantly curbed economic growth?

The OECD is calling for educational reforms to reduce inequality

Lord Wood of Anfield, a shadow cabinet minister and adviser to Ed Miliband, says Yes.

The OECD report confirms that inequality is not just a social problem, but a serious economic problem.

It estimates that, over a 20-year period, high and rising inequality cost Britain almost 9 percentage points of growth, while policies designed to reduce inequality show no evidence of hampering a country’s economic success.

A new consensus is emerging over the economic damage inequality causes – from the IMF to the OECD and Standard & Poor’s.

When inequality is high, opportunities for people to fulfil their potential are limited. And where that happens, the result is unfair and costly for all of us. That’s why Britain’s poor performance on productivity, technical skills and inequality are all connected.

There is no quick fix. As the OECD notes, reform of labour markets and education systems should be prioritised as much as redistribution.

But the evidence is now clear: inequality is not the natural by-product of economic success, but an obstacle to it.

Ben Southwood, head of research at the Adam Smith Institute, says No.

International cross-sectional studies like the OECD’s – which compare different countries at one point in time – are prone to errors. This is true even if you look at a group of similar (rich) countries like the OECD, which includes Sweden on the one hand and Mexico on the other.

Countries that punish crime harshly may have more crime, but that doesn’t mean punishing crime harshly increases crime.

Countries with more doctors may have more disease, but we’d expect that doctors are a response to disease, not a cause.

Similarly, countries with less inequality may have more growth, but cutting inequality may not boost growth.

For such questions, it’s better to use time-series data. And if you look at countries or regions where inequality jumps, growth typically jumps as well.

A highly-cited paper by Kristin Forbes, for example, found “an increase in a country’s level of income inequality has a significant positive relationship with subsequent economic growth.”

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