Countries With the Widest Gap Between the Rich and the Poor

May 29, 2015 by Mike Sauter

The United States, which prides itself as a land of opportunity, has the fourth-most uneven income distribution among developed nations, according to recently-released data. Only Turkey, Mexico, and Chile had worse income inequality, with Chile ranking as the most unequal overall.

The Gini coefficient measures how much an economy deviates from perfect equality — where everyone has the same income. A score of zero indicates perfect equality, and a score of one indicates extreme inequality. Based on index figures for Organisation for Economic Co-operation and Development (OECD) countries, these are the least equitable countries in the developed world.

Click to see the countries with the widest gap between the rich and the poor

The income redistribution structure of each country, which includes taxes, as well as transfers like welfare, social security, and unemployment insurance, can make a big difference in how severe the gap between rich and poor is. In nations with more progressive systems, income inequality is largely reduced after taxes and transfers are assessed. For example, income inequality in Finland fell from 13th-highest before taxes and transfers to sixth-lowest after they were assessed. On the other side, Israel and Turkey had better than average income inequality before taxes and transfers but were fifth and third worst, respectively, after taxes and transfers.

In an interview with 24/7 Wall St., Michael F. Förster, senior policy analyst for Income Distribution and Poverty at the OECD. explained that In nearly every case, taxes actually have less of an impact on the Gini coefficient than transfers. “In all OECD countries, it is the effect of cash transfers which has a stronger role on redistribution than income taxes, with one exception.” That exception, he added, is the United States.

Less-wealthy nations do not necessarily have lower income inequality. For example, Slovenia had the 11th-lowest GDP per capita and also the least income inequality. However, most of the countries with the highest income inequality also have less robust economies and rank in the bottom half of the OECD for GDP per capita. The notable exception to that rule is the United States, which had the fourth-highest GDP per capita in the OECD.

Several of the countries with the highest income inequality have issues with employment. On the list are Spain, Greece, and Portugal, which are known for their recent economic struggles and staggeringly high unemployment rates. However, the unemployment rate doesn’t always tell the full picture. Much has been made of the people who have re-entered the ranks of the employed taking lower salaries or part-time work in the United States, and the effect that has had on increasing the gap between the wealthy and the poor.

Relative to some of these countries, the U.S. actually performs well for the proportion of people in part-time work that have been forced to take those positions because they felt that had no other options. Förster noted “In the southern european countries – Portugal, Greece, and Spain – the large majority is working involuntarily part-time. It’s not part-time or not part-time, it’s the nature of part-time which counts.” Indeed, in Spain, for example, two thirds of part-time employees were involuntary, compared to just 15% on average across the OECD.

If a disproportionate proportion of the population lives below the poverty line, national income distribution is much more likely to be worse. The five countries with the worst income inequality — Chile, Mexico, Turkey, the United States, and Israel — also had the five highest poverty rates in the OECD. The relationship is not perfect, however. The United Kingdom fell just outside the five worst countries for income equality, but its poverty rate was 13th lowest among developed nations.

To determine the countries with the most uneven distribution of income, 24/7 Wall St. reviewed post-tax and transfer Gini index scores published by the OECD. We also considered data on GDP growth, education, poverty, job growth, gross domestic product, as well as social spending, all from the OECD. All figures are from the most recently available year. All ranks are out of the OECD countries with data available.

These are the countries with the widest gap between the rich and poor.

10. Greece
> Gini index – post tax & transfer: 0.335
> Social spending, pct. of GDP: 24.0% (12th highest)
> Chg. in Gini after tax & transfer: 0.220 (3rd largest)
> Poverty rate: 15.2% (7th highest)

The health of a labor market is a factor affecting income inequality. Residents of countries with high unemployment rates may be less likely to earn a decent living. Greece, which went through a financial crisis in 2009, certainly fits the bill as a country where good-paying jobs are hard to come by. The country’s annual unemployment rate as of last year was more than 26%, the worst of any country in the OECD. The country’s part-time workers were much more likely to be unemployed because they had no other options. Moreover, 46.6% of the country’s part-time workers would have preferred a full-time job but could not find one. This was much higher than the 15% across the OECD.

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9. Japan
> Gini index – post tax & transfer: 0.336
> Social spending, pct. of GDP: N/A
> Chg. in Gini after tax & transfer: 0.153 (11th smallest)
> Poverty rate: 16.0% (6th highest)

In every country in the OECD, income inequality was mitigated somewhat by the country’s taxes and transfers, which include welfare and other forms of social assistance. In Japan, the country’s Gini index score fell from 0.488 before taxes and transfers to 0.336 after the fact. A college education often ensures a higher income, and so it might make sense that a well-educated population would be less likely to have high income disparity. Japan is at least one case where this is not the case, as nearly half of the country’s 25-64 year olds had the equivalent of a college degree, the third-highest proportion in the OECD.

8. Portugal
> Gini index – post tax & transfer: 0.341
> Social spending, pct. of GDP: 25.2% (10th highest)
> Chg. in Gini after tax & transfer: 0.196 (11th largest)
> Poverty rate: 11.9% (12th highest)

Spending on social programs such as welfare, housing, and unemployment insurance can have an impact on income inequality, but in the case of Portugal this is clearly not sufficient. Just over 25% of the country’s GDP was spent on social programs compared to an OECD average of 21.6%. The country is one of a handful of European nations that have been mired in economic struggles for years, even receiving a bailout in 2011 from the European Union and the IMF. Portugal had the third-highest unemployment rate in the OECD, with 13.8% of the workforce looking for work and unable to find it. Not surprisingly, the country also had one of the highest rates of residents working part time because they felt they had no other alternative.

7. Spain
> Gini index – post tax & transfer: 0.344
> Social spending, pct. of GDP: 26.8% (8th highest)
> Chg. in Gini after tax & transfer: 0.176 (15th largest)
> Poverty rate: 15.1% (8th highest)

Arguably even more than Portugal, Spain has dealt with severe financial and economic struggles as a result of the global financial crisis. Spain’s ongoing economic depression has coincided with an abysmal job market. The country’s unemployment rate was just shy of 25%. Further, nearly 10% of those who were able to find jobs in Spain have been forced to take part-time work because they could not find other employment. It is the highest rate in the OECD and nearly four times the average rate. While the employment issues may have had an impact on Spain’s income inequality, low educational attainment rates among its adult population may also be a factor. More than 44% of Spain’s 25-64 year olds had not achieved more than a high school degree.

6. United Kingdom
> Gini index – post tax & transfer: 0.344
> Social spending, pct. of GDP: 21.7% (16th lowest)
> Chg. in Gini after tax & transfer: 0.181 (12th largest)
> Poverty rate: 9.5% (13th lowest)

Before taxes and transfers, the United Kingdom had a Gini index score of 0.525, which was fifth in the OECD. After taxes and transders, the score fell to 0.344, which was sixth among the countries considered. Like many of the nations with high income inequality, the UK has a relatively large economy with a GDP of $2.5 trillion as of 2014, the fifth highest in the OECD. However, the country’s GDP per capita of $39,510 was 17th highest. The country was also among the nations with the highest proportion of workers in part-time jobs because they were unable to find full-time work.

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5. Israel
> Gini index – post tax & transfer: 0.377
> Social spending, pct. of GDP: 15.5% (4th lowest)
> Chg. in Gini after tax & transfer: 0.103 (5th smallest)
> Poverty rate: 20.9% (2nd highest)

Even in countries with more conservative structures, taxes and transfers usually mitigate income inequality somewhat. In Israel, the Gini score fell from 0.481 to 0.377. However, they did not have nearly as much of an equaling effect as in other countries. In fact, the country ranked 16th-least equal before taxes and transfers and fifth-least equal after taxes and transfers. Income inequality means poverty rates are certain to be higher, and that appears to be true in Israel as well. More than 20% of the country’s population lived below the poverty line, the second worst rate in the OECD. Higher educational achievement may help reduce the country’s income inequality. Just 15% of the country’s 25-64 year olds had failed to achieve at least the equivalent of a high school diploma, compared to an average 23.46% across the OECD.

4. United States
> Gini index – post tax & transfer: 0.389
> Social spending, pct. of GDP: 19.2% (10th lowest)
> Chg. in Gini after tax & transfer: 0.118 (6th smallest)
> Poverty rate: 17.4% (5th highest)

The United States once again ranks as one of the least equal developed nation in the world. It is also very unusual as a less equal nation. The United States is one of the wealthiest countries in the world with a GDP per capita of close to $55,000, fourth highest in the OECD. In fact, of the 16 nations with the highest per capita income in the OECD, the United States is the only one among the worst nations for income inequality. The United states had the fourth largest proportion of adults with a college degree. Having more college graduates might have helped reduce inequality in the country.

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3. Turkey
> Gini index – post tax & transfer: 0.412
> Social spending, pct. of GDP: 12.5% (3rd lowest)
> Chg. in Gini after tax & transfer: 0.062 (3rd smallest)
> Poverty rate: 19.2% (3rd highest)

Turkey is one of poorest countries in the OECD with a GDP per capita of $18,993, second lowest among nations considered. It also had the third highest poverty rate in the OECD with 19.2% of its residents living below the poverty line. Turkey is another nation in which taxation and redistribution system does not reduce income inequality nearly as much as in most OECD nations. The country’s income inequality was 18th worst in the OECD before taxes and transfers and third worst after.

2. Mexico
> Gini index – post tax & transfer: 0.482
> Social spending, pct. of GDP: N/A
> Chg. in Gini after tax & transfer: N/A
> Poverty rate: 21.4% (the highest)

Less wealth per capita does not guarantee higher income inequality, but most of the OECD nations with the worst income inequality had less robust economies. This includes Mexico, which had a GDP per capita of just $17,880, the lowest among the nations considered and less than a third of the U.S. figure. Lower unemployment might be expected to maintain more equal salaries, but that does not appear to have made a big difference in Mexico. The country had an extremely low unemployment rate of just 4.8%, fourth lowest in the OECD. Given the high rate of income inequality in the country, it is not surprising that Mexico had the highest poverty rate of any OECD country at 21.4% of its population.

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1. Chile
> Gini index – post tax & transfer: 0.503
> Social spending, pct. of GDP: 10% (the lowest)
> Chg. in Gini after tax & transfer: 0.029 (the smallest)
> Poverty rate: 17.8% (4th highest)

Chile is the only nation in the OECD with a Gini index score after taxes and transfers higher than 0.5. This is so severe it actually surpasses the OECD average Gini score before taxes and transfers. While it is no guarantee, spending on social assistance programs can have an impact on inequality. In Chile, that was not a factor, as the country spent just 10% of its annual GDP on social programs, lower than any other developed nation and less than half the OECD average. Chile also had a poverty rate of 17.8%, fourth worst in the OECD.