Inequality, Growth and Living Standards in OECD Countries: A Changing Relationship?

Economic growth (as conventionally measured) may be harder to achieve and may no longer suffice to drive improvements in living standards for ‘ordinary’ households in the rich countries of the OECD. Increasing inequalities in income and wealth are widely observed in recent decades, and are of concern not simply in themselves, but also because they may have gone together with stagnation in living standards except at the top of the distribution, and may undermine growth prospects for the future. Concerns about ‘secular stagnation’ go together with an emphasis on the ‘squeezed middle’ in the aftermath of the financial crisis. This paper contributes to such debates by first tracking how income levels (adjusted for prices) have evolved at different points in the income distribution over the past thirty years for working-age households in OECD countries, using data from the Luxembourg Income Study and the OECD Income Distribution Database, and assessing the extent to which this can be construed as a ‘squeeze’ on middle income living standards in particular. We then relate these patterns in living standards to GDP growth, the aggregate income going to households, real earnings and earnings dispersion, and the changing distribution of household incomes before and after transfers and direct taxes. This allows us to see how the elasticity of (real) income with respect to changes in GDP at different points in the distribution has evolved over time in the countries covered, and explore the complex dynamic interactions between economic growth, inequality and living standards. Particular attention is paid to whether the experience up to and through the crisis is consistently and markedly different to what was seen in the preceding decades across the OECD in terms of living standards and what drives them.