Kathleen Brooks, Research Director, Forex.com
Whether you look at press reports in the US, Egypt, Saudi Arabia or Europe there is one consistent theme that keeps creeping up, that of income inequality. President Obama has pinned his hopes to winning a second term in office by calling for the rich to pay more tax. Occupy movements across the developed world are also calling for greater fairness, in the UK both ends of the political spectrum are calling for restraining bankers bonuses and in Egypt protestors gathered once more in Tahrir Square last week to call for faster reform.
Acting to narrow the gap between rich and poor is the new global zeitgeist and it has been a long time coming. According to the Organisation of Economic Cooperation and Development the average income of the top 10 per cent of earners in OECD countries has expanded to about nine times that of the poorest 10 per cent over the last two decades. And income inequality isn't only a problem in developed nations it is also growing in emerging markets also. But if this is not a new phenomenon then why is it centre stage now?
One argument is that in the times of plenty - read pre-2008 financial crisis - income inequality is easily ignored as economic confidence is high and jobless rates are low. However, the lasting legacy of the global recession has been stagnant or falling wages, cuts to social spending in the West and high levels of unemployment, especially amongst the young. Combine that with elevated energy and food prices and you have a major problem on your hands.
So whether its bankers bonuses in the UK, billionaires' tax rates in the US, or youth unemployment in Egypt and Spain, politicians have to act now to get this situation under control otherwise the next few years could be marked by increased levels of social upheaval.
But there is a problem, as the OECD points out; identifying the causes of income inequality is not easy. Some blame globalisation and out-sourcing jobs from former manufacturing bases like the US and Europe to lower cost centres in Asia, others think that it is due to technological innovation that has boosted productivity and thus benefited the highly skilled while others blame policy decisions and mistakes by law makers.
Social reasons change is also a cause of income inequality especially in developed economies, according to the OECD. The first is the rise of the "single" household. As less people marry and have fewer family members to support their earnings rise. Added to this is a growing phenomenon called "assortative mating" with high earnings choosing spouses in the same earnings bracket as them, such as doctors marrying doctors and not nurses. This tends to boost incomes of the middle and upper middle classes in society. So changing household structures can also contribute to the income inequality debate.
However, this only adds to the complexity of the problem: rising levels of female education is considered progress and what a lot of emerging and developed economies strive for, yet there is evidence to suggest that this has contributed to income inequality in the OECD. For economies in the Middle East trying to re-build themselves after the Arab Spring, it's hard to find a reliable model to follow.
However, hope is not lost. The OECD has four ideas that can ease the strain and help support the earnings of lower-skilled workers so that in the next decade the income inequality gap does not widen even more.
And it's not all about raising taxes and government spending, however, the OECD does believe that some changes in these areas will help. That doesn't just mean sock the rich - although some of the mega wealthy like Warren Buffet, George Soros and Bill Gates believe they are not taxed enough - but the OECD suggests that tax policies may need to be reviewed in light of current circumstances. Added to that government transfers' of cash to support low income workers who have seen their earners get slashed by the recession could also improve the rich/ poor divide.
But raising taxes and boosting spending will not solve the income inequality conundrum. The most effective way to do this is through education and the OECD has evidence that where education levels are rising then income inequality tends to fall. Boosting access to education is one way that countries across the Middle East could try and avert a re-run of last year's Arab Spring protests.
For those economies with high unemployment anyway, like parts of Europe and the US, then ensuring in-work training is provided to keep up with technological developments along with tertiary education for older people and access to education throughout ones' working life such as night school etc, is another effective way of reducing wage dispersion in an economy.
The spirit of public protest may have originated in the Middle East last year, but the causes behind it are global in nature and require a global political effort to change this worrying trend. Wage inequality leads to social ills like rising crime rates, so without urgent action and ideas like those provided by the OECD being taken seriously then we could see more extreme versions of the Arab Spring and Occupy movements across the world, rocking political and financial stability.
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