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Income inequality grew in most OECD countries between the mid 1980s and the mid 2000s. On average the income of the richest 10 percent of the population is now almost nine times higher than the poorest 10 percent. In Denmark and Sweden the gap is narrower with the richest 10% earning on average less than five times the poorest.
Only a few countries bucked the trend: France, Greece and Spain moved towards greater equality of incomes over the past 20 years.
The United States has one of the highest levels of inequality with the average earnings of the richest 10 % of the population 16 times higher than the poorest 10 percent. The gap between rich and poor in the US has also widened more rapidly than in most other countries over the past 20 years.
The two poorest and most unequal OECD countries – Mexico and Turkey – saw big rises in inequality between the mid 1980s and mid-1990s. But there were equally large falls in the subsequent decade. In the UK, inequality increased throughout the 1980s then remained stable, and fell from 2000-2005. The following tables from OECD Growing Unequal? report show trends in selected countries:
Source: Growing Unequal? Income Distribution and Poverty in OECD Countries
Governments have been taxing more and spending more in an attempt to offset this growing income gap but reducing inequality also means ensuring that people have a decent income. OECD says governments have to get more people into work so that there is less reliance on unemployment, disability and early retirement benefits. But work alone is not sufficient to avoid poverty; more than half of poor people live in households where one or more members are in work. Public services such as education and health are distributed more equally than income. Policies to improve child development also make a difference.
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Until the latest statements suggesting unlimited guarantees, legal coverage was highest in Norway, France, Italy and Mexico. In the US the amount covered has been raised temporarily to 250,000 from 100,000 US dollars per account. The following graphs show coverage in early 2008 and the position as of 8 October 2008, based on government statements:
Source: Financial Market Trends No. 94 July 2008
For a savings insurance system to be effective in preventing bank runs in times of crisis, coverage must be set at adequate levels. Savers need to know the limits of the coverage. But consumer surveys have shown that knowledge of existing schemes is poor. A recent OECD study compared the extent of coverage as of June 2008 in 33 countries (see Further reading below).
Critics of deposit insurance schemes suggest they encourage excessive risk-taking by banks as the institutions are protected by a public safety net if things go wrong. To minimise this “moral hazard” it is important to promote good governance by banks and ensure a sound supervisory framework to deal with excessive risk taking.
Financial safety nets consist of three interrelated elements: prudential regulation and supervision, a lender of last resort and deposit insurance. If a country has developed mechanisms in only one or two of these three areas, it is still likely to face difficulties in preventing or resolving serious problems in its banking system.
* “Unlimited ?” is an interpretation of the implication of recent announcements or policy statements for effective coverage limits and that the data shown may not be identical to existing legal limits. As such the data may not be strictly comparable across countries.
Further reading: