Large income gaps pose one of the most severe challenges that New Zealand faces, according to speakers at a conference organised by the Institute for Governance and Policy Studies.

The conference, entitled ‘Increasing Inequality: Causes, Consequences and Responses’, heard first from the OECD’s Michael Forster.

From 1980 to 2008, New Zealand’s top 1% captured 20% of total income growth, Forster said. While the top 1%’s income share had fallen around the world after the global financial crisis, “all the signs points to the fact that this was a transitory halt in the shares of the top income earners”.

Also on the international front, he said: “As the jobs crisis persists and fiscal consolidation takes hold, there is a great risk of further rises in inequality and poverty.”

The OECD’s analysis showed that technological change and increasing rewards for skilled workers had played a big part in increasing inequality, but other factors – including a less redistributive welfare system – had also widened income gaps.

Policies were needed in three key areas to reduce inequality: investment in skills and training, creating more high-quality jobs – “in the past, there was too much emphasis on more jobs … [we need] jobs which can provide a career” – and reforming tax and welfare systems.

On the last point, Forster said there was “scope for reviewing some tax provisions in light of increased tax capacity among top income households”.

The conference also heard from Professor Robert Wade, a New Zealand-born political economist from the London School of Economics.

Wade outlined the significant health, economic and political costs of inequality. While some mainstream economists claimed that inequality was needed for growth, the very equal northern European countries had some of the world’s highest growth rates per hour worked, he said.

In fact, inequality posed a threat to the economy by reducing the spending power of the lower and middle classes, and by helping create the kind of asset bubbles that had led to the global financial crisis.

But it was the political costs of inequality that were most concerning, Wade said. Great wealth created a “money-empathy gap” that led the top 1% to demand policies very different from those sought by the general public.

This great wealth also allowed the top 1% to get their way, he said, citing research showing that US politicians are much more responsive to their wealthy constituents than to their poorer ones.

To stress the fact that everyone was affected by inequality, Wade used the metaphor of a swimming pool “with a urinating and a non-urinating section”. In this metaphor, “Those people in the non-swimming section cannot insulate themselves from the behaviour of those in the urinating section.”

All proposed laws should be assessed for their potential impact on income gaps, Wade said, even those – like monetary policy – that appeared far removed from income distributions. In particular, campaign finance reform was needed to stop the wealthy from unduly influencing politics.

On Q+A this morning, there was much discussion about inequality, and in particular New Zealand’s very low wages, which leave so many reliant on a Working for Families top-up. The question is, how to get out of that low-wage trap?

At this point, classical economics isn’t very helpful, because it tends to focus on comparative advantage: the idea that whatever you do better than other countries is what you should stick with. And at the moment what we do best is produce low-value goods cheaper than other developed countries because our wages are so low.

To get out of that trap requires a game-changer, a trap-breaker. As one of the contributors to Inequality: A New Zealand Crisis, Nigel Haworth, argues, we need a combined push from government, business and unions to shift ourselves – in ways that the market alone won’t do – into a high-value, high-wage state.

That means more government investment in R+D and other changes.

But in particular, it means reversing the idea that you have to have economic growth first, then you can afford higher wages. Instead, we have to realise that if we pay people better, and do a few other things, people will work harder and more productively – thus generating the high-value economic growth that we need.

That’s because better paid people feel more rewarded. They’ll also work better if they have more input into how their company is run.

So we need that game-changer to break out of the low-wage trap – and, at the same time, reduce inequality.

On Monday night we had the first of the talks by Professor Robert Wade about rising inequality around the world.

As you can see, it was a full house, with people standing in the aisles and at the back so as to be able to hear Robert talk about the way that the current system drives ever increasing amounts of income towards the top 1%.

More talks to follow in Dunedin, Christchurch and Wellington – see the Upcoming Events page for more details.