On Income Inequality in Australia

In their second Economic Roundup for 2013, the Australian Treasury released an article (by Michael Fletcher and Ben Guttman) on Income Inequality in Australia. The article looks at changes in income inequality in Australia over the past twenty years, and tries to explain those changes. Also, it asks, if income inequality is in fact increasing, how much should we care?

That question may seem a little callous at first – we’ll come back to it. First, there is the question of what has happened to income inequality in Australia. The answer to this in part depends upon how income inequality is measured. (As the definition of income, the authors use equivalised household disposable income, which to me at least seems fairly uncontroversial – this is the income the household receives, plus cash transfers provided by government, less direct taxes, and adjusted for the composition of the household.) Using the ‘Gini coefficient’ measure of income inequality, the income distribution in Australia has become more unequal over the past twenty years, and has done so for all states (more so for Western Australia). The ‘P90/P10’ measure – the income of a household in the 90^th percentile (i.e. just at the top 10 per cent) compared to the income of a household in the 10^th percentile (i.e. just at the bottom 10 per cent) – has also increased over this period. However, the ‘P80/P20’ and ‘P80/P50’ measures have been fairly steady.

Personally, I like the Gini coefficient measure, as it captures what is happening in the whole distribution, not just at particular points of it. (See the Wikipedia page for how the coefficient is calculated, as well as its limitations.) So income inequality is increasing, and the authors show that it has increased at a greater rate than other developed nations. What might be driving this? Labour earnings inequality has been decreasing (with employment amongst low-income households increasing), but this appears to have been offset by changes in investment income, at least up until the global financial crisis.

However, Australia’s sustained period of economic growth and other factors means that Australia’s low-income households have actually fared relatively well by international standards in terms of income growth, even if they have fallen further behind other households in Australia. Which brings us back to the question: how much should we care? If my income (after accounting for price changes) is increasing, why should I care if those of my fellow citizens are increasing by more? Well, many people do – studies have shown that people care if their relative income falls, even if their absolute income is rising. Even if we were all ‘psychologically well-adjusted’, there may be other reasons to care about inequality (for example, increasing ‘social cohesion’). Fletcher and Guttman claim that Australia allows for the greatest share of benefits to be targeted towards low income earners compared to any other developed nations, so implicitly it seems we care about inequality a lot. But while it looks like we should be mindful of our increasing income inequality, it doesn’t look like we should panic about it just yet.