New Zealand and Mexico the OECD economies most affected by inequality

The New Zealand parliament buildings in Wellington. Photograph: Matthew Williams-Ellis/Getty Images/Robert Harding World Imagery

Inequality has a detrimental effect on economic growth, a new OECD report has found.

The changes in inequality in the two decades following 1995 resulted in both New Zealand and Mexico losing an estimated ten percentage points in growth between 1990 and 2010, according to the thinktank.

Note: The chart reports the estimated consequences of changes in inequality on the growth rate of GDP per capita (relative to the population aged 25-64) over the period 1990-2010. Actual growth in Germany is computed starting in 1991; the changes in inequality are limited to the period 1985- 2000 in the case of Austria, Belgium, Spain and Ireland. (Chart: OECD)

The UK is estimated to have missed out on nine percentage points of growth. More equal economies in France, Spain and Ireland helped boost their economies prior to the world’s financial crisis.

But how is this all calculated?

The measure of inequality used by the OECD is the Gini coefficient. This ranges from zero, where everyone has identical incomes, to one, where all money is received by a single person.

Using the Gini coefficient, inequality rose in 16 out of the 21 OECD countries for which the data is available. It rose by more than five points in Finland, Israel, Sweden, the United States and New Zealand.

According to the OECD, the detrimental effect of a rise in the Gini coefficient to the wider economy can be measured. They explain as follows:

Rising inequality by three Gini points, that is the average increase recorded in the OECD over the past two decades, would drag down economic growth by 0.35 percentage point per year for 25 years: a cumulated loss in GDP at the end of the period of 8.5%.

The thinktank suggests higher top rates of income tax, scrapping tax breaks and reassessing how assets are taxed as methods of combatting inequality.