Spotlight: Growing inequality costs Germany dearly but still fixable

Growing inequality has cost Germany about 40 billion euros (42.66 billion U.S. dollars) over the past 25 years but the inequality comes with pros and cons and can still be fixed, a latest study here shows.

According to the study conducted by the German Institute for Economic Research (DIW), income is more unequally distributed in Germany in recent years.

The researchers come to the conclusion after examining the changes in German gross domestic product (GDP), or the sum of all goods and services manufactured in Germany, with a simulation model.

The Gini coefficient, a measure of inequality, has risen significantly from 0.25 to 0.29 in Germany since its reunification in 1991, German news website Focus Online reported, citing the study.

The Gini coefficient measures inequality on a scale from 0 to 1. A value of 0 would mean that every household has exactly the same income; at the value of 1, a household would get the entire income and all the others nothing.

IN UPPER MID-RANGE

According to the research, Germans are actually complaining a high level of inequality as far as the distribution of the net income of household is concerned.

In terms of the Gini coefficient, Germany is about 0.29 or in the upper mid-range of the same distributions of net income within the Organization for Economic Co-operation and Development (OECD).

In other major countries, the coefficient is much higher than in Germany. For example, Canada and Italy have a value of 0.32 each. In Britain, it is 0.36, and in the United States, it is even 0.4.

The leading figure in the OECD is Chile with a value of 0.47. At the other end is Iceland with 0.24, which is not so far from Germany.

However, this is only part of the truth.

PROS AND CONS ON GROWTH

The research believes the Gini coefficient has actually risen significantly in Germany since German reunification. An increase from around 0.25 to now 0.29 within 25 years does not sound very much, but it has a big impact, researchers say.

As a result, Germany has lost some 40 billion euros in the past 25 years. Although the exact sum is roughly estimated, the magnitude of the cost is probably correct. Each year, the growing inequality costs the country about 0.05 percent of its economic growth. This may sound relatively little, but has already had a impact in absolute numbers as far as long-term growth is concerned.

The study also shows that growing disparities in income have both positive and negative effects.

The negative are initially the more obvious: if the inequality grows, the wages sink at the lower end of the scale and the people there have less money to spend -- hence the consumption decreases, thus the demand.

However, the inequality has a positive effect at the other end of the scale: whoever has more money also saves more, which is why the saving rate increases in Germany as the inequality grows.

This in turn leads to more investment and thus even to more productivity and higher exports. Moreover, because consumption is declining, less imports are needed, which means that foreign trade surplus is increasing.

HUMAN CAPITAL AT STAKE

In the end, the positive effects can not compensate for the disadvantages because of the so-called "human capital factor" which usually has a delayed effect, says the DIW research.

People with low wages have little money to invest in their education and training. This results in a vicious cycle: those who do not receive good education and training have fewer chances to find well-paid jobs and thus move into higher income classes. This will lead to more inequality.

In the worst-case scenario, it results in what sociologists call the "culture of poverty": children from low-income earners are leaving the school and starting a job earlier than expected instead of taking a baccalaureate and studying further -- because they have to earn money for a living. In this way, only a few people from low-income families can rise into high income classes.

HOW TO FIX IT

This is precisely where the DIW research believes there is necessity to take actions.

"Against this background, policy measures are all the more important, which are appropriate to improve the equality of opportunity and permeability in the education system," said the Focus Online report, citing the research.

This would include free or at least very cost-effective day-care services, German courses for migrant children, remedial classes and universities, the research suggests.

But even if actions were to be taken to improve the situation, inequality in Germany would continue to grow for a few more years before the negative consequences of previous years are fully addressed. Endit