Key Points:

Income inequality increased significantly in New Zealand between the mid-1980s and mid-2000, a report on inequality trends in OECD countries shows.

The three-year study by the OECD showed that in the last two decades, inequality had gone up in over three-quarters of OECD countries.

"New Zealand has made a good start in recent years with a higher minimum wage, paid parental leave, more flexibility in working hours, support for early childhood education and family tax credits," said Council of Trade Unions economist Peter Conway said.

"But the momentum must continue in these difficult economic times - particularly through support for decent jobs."

New Zealand and Finland were the only two OECD countries to show a significant increase in income inequality between mid-1980 and mid-2000.

Most countries showed either a small increase in inequality or no change, while France, Ireland and Spain showed a small decrease in inequality, the report showed.

Over the same period, there was a significant increase in income poverty in New Zealand, measured as below the threshold of half of median income. Only five other OECD countries showed the same level of increase.

"This shows that the policies of the late 1980s and 1990s were a disaster for low income families," Mr Conway said.

"We do not want a repeat of policies such as reducing workers employment law rights, freezing the minimum wage, cutting benefits, and user pays for public services."

OECD Secretary-General Angel Gurria said that education, boosting family income of those in work, and direct measures to tackle poverty were the best policies.

It was a myth that inequality encouraged people to try to do better, or was conducive to economic growth, the report found.

"On the contrary, our work shows that greater income inequality stifles upward mobility between generations, making it harder for talented and hard-working people the get the rewards they deserve," Mr Gurria said.

The world had experienced an unprecedented era of economic growth in recent decades, which had made people better off, on average.

"But, like with all averages, this is more true for some than for others. Our study shows that growth has benefited the rich more than the poor in recent decades," he said.

On average, in 2005, the richest 10 per cent of the population in OECD countries had nine times more income than the poorest 10 per cent.

A key element in reducing poverty was the creation of more and better jobs.

Imposing more taxes to fund social spending reduced incentives to work, save and invest, Mr Gurria said.

"Although the role of the tax and benefit system in redistributing income and in curbing poverty remains important in many OECD countries, our data confirms that its effectiveness has gone down in the past 10 years," he said.