Countries where income inequality is falling grow faster than those with rising inequality, the Organisation for Economic Co-operation and Development (OECD) says.
The international think-tank's latest report reveals an increasing gap between haves and have nots has knocked almost nine percentage points off gross domestic product in the UK, 10 in Mexico and New Zealand and between six and seven in the US, Italy and Sweden in the two decades pre-GFC.
"This compelling evidence proves that addressing high and growing inequality is critical to promote strong and sustained growth and needs to be at the centre of the policy debate," OECD secretary general Angel Gurria said on Tuesday.
"Countries that promote equal opportunity for all from an early age are those that will grow and prosper."
It is the gap between the bottom 40 per cent and the rest of society, not just the poorest 10 per cent, that contributes to the effects of inequality on a country's growth, the paper said.
The report is part an effort to find the root causes and see what lessons can be learned from the global financial crisis.
Anti-poverty programs are not enough to tackle the problem, the OECD warned, claiming "education is the key".
The paper claims to have discovered new evidence that the main way inequality affects growth is by undermining education opportunities for children from poor socio-economic backgrounds, lowering social mobility and hampering skills development.
While the children of parents who have had low levels of education see their educational outcomes deteriorate as income inequality rises, there is little or no effect on people whose parents have had a middle or high level of education, it said.
The paper states that investment is needed in high-quality education, training and healthcare in order to create greater equality of opportunities, and it claims redistributing taxes and benefits does not harm a country's economic growth so long as the policies are "well-designed, targeted and implemented".
