Discussion paper

Income inequality in Australia

6 Dec 2013

There is a keen national and international interest in the topic of income inequality. The release by the Organisation for Economic Co-operation and Development ( OECD) of their report s Growing Unequal (OECD 2008) in October 2008 and Divided We Stand (OECD 2011) in December 2011 sparked international commentary and led the World Economic Forum to declare that inequality was a top economic risk.

Over the past twenty years, Australia has experienced a period of sustained economic growth. This has resulted in an increase in earnings from both labour and capital, which has benefited households across the income distribution (Greenville et al. 2013) and has led Australia to have the second highest ‘average’ income growth between the mid -1990s and the late 2000s amongst OECD nations . During this period, Australians in the bottom 10 per cent of the income distribution have experienced the fifth highest income growth in the OECD, at 3 per cent per annum. It is this strong growth across the income distribution that sets Australia apart from other OECD countries .

Nevertheless, while labour income inequality has been on the decline, overall income inequality in Australia has been rising since the mid -1990s. Measures that focus on the very top income earners show a strong gain in their share of national income, as is the case in most OECD countries. Despite all the research by the OECD and many others, the policy implications of income inequality remain unclear. For example, a more equal income distribution does not necessarily lead to a higher standard of living for any group in society, and rising or falling income inequality by itself cannot be categorically labelled as bad or good without an understanding of the underlying causes. This is particularly pertinent in the Australian context, given that an upward trend in income inequality since the mid -1990s has also coincided with a period of sustained economic growth. We do know that there are complex trade- offs between equity and efficiency objectives in policy settings, and that a singular focus on equity without regard to efficiency can be counterproductive for both.

In this article we take a broad perspective by looking at aggregate trends in income inequality, rather than trying to disaggregate the effects of individual policy changes. In addition, income, while valued because of its ability to support consumption choices, is not the only thing that matters when considering inequality. Equality of access to health, education, housing and community safety — just to name a few — are also important, especially at the lower end of the income distribution . This makes measures of poverty in Australia also relevant when considering the implications of changing trends in income inequality.

This paper examines income inequality in Australia, how we compare with other countries and what might be driving our results. In doing so, the paper aims to contribute to a better understanding of income inequality by drawing on a variety of measures. We then ask the questions: ‘How much should we care about income inequality? ’ especially in circumstance such as Australia’s where most people are doing better, and ‘what are the implications for policy makers?  

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Economic Roundup
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