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Recent OECD findings confirm that the global economic crisis resulted in considerable reductions in incomes from work and capital between 2007 and 2010 in most OECD countries. Not accounting for national social and fiscal transfers that mitigate income losses to some extent, income inequality between 2007 and 2010 actually increased more during this period than during the last 12 years before 2007.



The crisis period up to 2010 saw upsurges in unemployment and decreases in real wages. As a consequence, household disposable income was significantly reduced and this was felt disproportionately in severely hit countries such as Greece, Spain, and Ireland. The pain of the crisis was unevenly shared with income inequality increasing on the whole. Countries that experienced largest drops in incomes, such as Ireland, Spain, Greece, Estonia, Hungary and others, also witnessed compounded particularly large increases in income inequality.



Public cash transfers and cuts in personal income taxes have to some extent mitigated the drops in disposable household incomes and cushioned the observed increases in income inequality. Tax and benefit systems combined with fiscal stimuli to boost demand have alleviated some of the pain and brunt brought about by the crisis. The mitigating effects of taxes and social transfers on falls in income were spread unevenly across OECD countries. Given the varied increases in both market and disposable income inequality, the recent findings indicate that taxes and social transfers only hold limited effectiveness in terms of income redistribution (reduction of income inequality) and poverty alleviation.



OECD data highlights that the bottom 10% of the income quintiles either lost more in terms of income or benefited less from redistributive social transfers and fiscal stimuli. Levels of income inequality show large differences across OECD countries. Increasing income inequality was felt strongly in countries where household disposable income dropped the most such as Greece, Ireland, Spain, Iceland, and Italy.



On average, taxes and social transfers have been quite effective in addressing the effects of incomes drops on relative poverty. If one uses a different indicator in measuring poverty, recent increases in income poverty are much larger than suggested with a relative indicator, particularly in countries such as Spain, Ireland, and Greece. Different groups witnessed differing poverty trends. As seen, taxes and social transfers compensated only parts of the increases in income inequality and poverty. Furthermore, the OECD findings show that relative income poverty increased among children, youths and adults whereas it decreased for the elderly population.



Should economic growth remain sluggish and the austerity and fiscal consolidation are pursued, the capacity of the tax-benefit system to mitigate the high and increasing levels of income inequality and disposable income poverty could seriously be at risk and even challenged.



The OECD Note can be accessed via the Related Files tab.