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ILO: Financial Crisis Will Cause Income Inequality Gap to Widen

The International Labor Organization finds the gap between the world's rich and poor is vast and growing, despite economic growth that has produced millions of new jobs since the early 1990s. Lisa Schlein reports for VOA from Geneva the group says long-term structural reforms need to be adopted.

The ILO annual World of Work Report says it is not opposed to amply compensating people in charge of high-flying enterprises. It says a certain degree of income inequality is useful in rewarding effort, talent and innovation.

But ILO Institute for Labor Studies Director Raymond Torres says excessive income inequality can be counter-productive and damaging for most economies.

"Indeed, there is evidence that when income inequality is too high, there can be more instability in society," he said. "We have evidence, for example in studies on crime rates and so on. More certainly, the political support for pro-growth policies like trade and foreign direct investment, which are important for economic growth, can be weakened if the middle-class and low-income groups think that they do not get the benefits of growth produced for those pro-growth policies."

The report notes the income gap between top executives and the average employee is widening. For example, it finds in the United States chief executive officers of the 15 largest companies last year earned 520 times more than the average worker. And, this is up from 360 times more in 2003.

The ILO report cites similar patterns in Australia, Germany, Hong Kong, the Netherlands and South Africa.

Torres says these huge executive paychecks are not always deserved.

"The report ... shows these executive pay trends have not been related, certainly not always been related to firm performance. And, that there has been a growing disconnect between executive pay trends and the performance of the firms that those executives actually manage. This reflects institutional flaws," he said.

Torres says the short-term effect of the current financial crisis may be to reduce income inequality because people in the higher-income brackets play on the stock market, which now is in free-fall. But, he says previous crises show it is the most vulnerable people who suffer the greatest consequences.

The report warns too much income inequality weakens one of the engines of economic growth, which is domestic demand. It says a major share of the cost of the financial and economic crisis will be borne by hundreds of millions of people who have not shared in the benefits of recent growth.