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Thursday, October 23, 2008

World Of Work Report 2008: Global Income Inequality Gap is Vast and Growing

MANILA (ILO News) - Despite strong economic growth that produced millions of new jobs since the early 1990s, income inequality grewdramatically in most regions of the world and is expected to increasedue to the current global financial crisis, according to a new studypublished today by the research arm of the International LabourOrganization.

The new report, entitled World of Work Report 2008: Incomeinequalities in the age of financial globalization */ produced by theILO*s International Institute for Labour Studies also notes that amajor share of the cost of the financial and economic crisis will beborne by hundreds of millions of people who haven*t shared in thebenefits of recent growth.

In Asia and the Pacific, modest declines in income inequalityoccurred only in Cambodia and the Philippines, where income inequalityremains nonetheless among the highest in the region. The Philippines hasestimated income inequality of 52 in 1990s but decreased to 50 in 2000. However, this is the highest in Asia and the Pacific region where 0 iscomplete equality and 100 is complete inequality. Singapore, Thailandand Cambodia are estimated below 50. China, Viet Nam, India and Laosare estimated below 40 but no decline in income inequality. China andLaos even recorded substantial increases in income inequality over theperiod 1990-2000.

From a longer-term perspective, the benefits of financialdevelopment outweigh its costs, in terms of both inequality and jobcreation. *It took two to seven years for individual countries in Asiathat have been hit by a financial crisis to recover to pre-crisislevels. Indonesia, Malaysia, the Republic of Korea, Thailand and thePhilippines are among the five hardest hit countries between 1997 and1998. For Asian countries like the Philippines, the trend after thecrisis has been a decrease in labour force participation, formalemployment rates fell taking years to recover and poverty has fallencontinuously,* said Linda Wirth, Director of the ILO SubregionalOffice for South-East Asia and the Pacific based in Manila.

"We see crisis as an opportunity to review and learn. Policies and social protection systems in place can do and have aneffect on a country*s ability to cope. It is important to design andimplement labour and product market policies to prepare countries toadjust quickly," said Wirth.

"This report shows conclusively that the gap between richerand poorer households widened since the 1990s," said Raymond Torres, Director of the ILOis International Institute for Labour Studiesresponsible for the report.

"This reflects the impact of financialglobalization and a weaker ability of domestic policies to enhance theincome position of the middle class and low-income groups. The presentglobal financial crisis is bound to make matters worse unless long-termstructural reforms are adopted."

The report notes that while a certain degree of incomeinequality is useful in rewarding effort, talent and innovation, hugedifferences can be counter-productive and damaging for most economies, adding that "rising income inequality represents a danger to thesocial fabric as well as economic efficiency when it becomesexcessive."

The report marks the most comprehensive study to date of globalincome inequalities by the Institute, and examined wages and growth inmore than 70 developed and developing countries. It calls for longerterm action to put the global economy on a more balanced track,including promotion of the ILO's Decent Work Agenda to link economic,labour and social policies to boost employment and improve incomes andincome distribution.

The report says that as global employment rose by 30 per centbetween the early 1990s and 2007, the income gap between richer andpoorer households widened significantly at the same time. What*s more,compared with earlier expansionary periods, workers obtained a smallershare of the fruits of economic growth as the share of wages in nationalincome declined in the vast majority of countries for which data wasavailable.

"The ongoing global economic slowdown is affecting low-incomegroups disproportionately", the report says. "This development comesafter a long expansionary phase where income inequality was already onthe rise in the majority of countries."

Among its other conclusions, the report says:
* Employment growth has also occurred alongside a redistributionof income away from labour. In 51 out of 73 countries for which data areavailable, the share of wages in total income declined over the past twodecades. The largest decline in the share of wages in GDP took place inLatin America and the Caribbean (-13 percentage points), followed byAsia and the Pacific (-10 percentage points) and the Advanced Economies(-9 percentage points).

* In countries with unregulated financial innovation, workers andtheir families became increasingly indebted in order to fund housinginvestment and consumption. With stagnant wages, this was key to sustaindomestic demand. However the crisis has underlined the limits to thisgrowth model.

* Between 1990 and 2005, approximately two thirds of the countriesexperienced an increase in income inequality. The incomes of richerhouseholds have increased relative to those of the middle class andpoorer households.

* Likewise, during the same period, the income gap between the topand bottom 10 per cent of wage earners increased in 70 per cent of thecountries for which data are available.

* The gap in income inequality is also widening - at an increasingpace - between top executives and the average employee. For example, inthe United States in 2007, the chief executive officers (CEOs) of the 15largest companies earned 520 times more than the average worker. This isup from 360 times more in 2003. Similar patterns, though from lowerlevels of executive pay, have been registered in Australia, Germany,Hong Kong (China), the Netherlands and South Africa.

Noting that prospects are for a continuing increase in incomeinequality in the course of the present economic situation, the reportalso added that excessive income inequalities could be associated withhigher crime rates, lower life-expectancy, and in the case of the poorcountries malnutrition and an increased likelihood of children beingtaken out of school in order to work.

*Already now, there are widespread perceptions in manycountries that globalization does not work to the advantage of themajority of the population*, the report says. *The policy challengeis therefore to ensure adequate incentives to work, learn and invest,while also avoiding socially-harmful and economically-inefficient incomeinequalities.*

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