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PC News - May 2019

Is Australia becoming more unequal?

In a research paper released in August last year, the Commission brought together the most recent evidence measuring inequality, poverty and disadvantage in Australia.

Excessive inequality and entrenched disadvantage can erode social cohesion and hinder growth. But measuring the extent of inequality is not straight-forward. No single metric can provide a definitive answer to the question of whether inequality, poverty and disadvantage in Australia have risen, fallen or remained steady.

The Commission used an array of indicators to examine trends in inequality, including the distribution and composition of household income, consumption and wealth. Movements within the distributions over time, and in response to life events – such as transitions to work, divorce and retirement – were also examined.

Australia has had sustained economic growth, but how have the benefits been shared?

  • In every decile, the average household has benefited from income growth in recent decades

    This bar chart shows the average annual percentage growth in disposable income by income deciles between 1988-89 and 2015-16. The percentage increase is generally larger for higher income deciles than lower income deciles. The larger percentage increase is at the top decile, but the second largest percentage increase is at the bottom decile.
  • Australia’s level of income inequality is middle of the pack among developed countries

    This dot plot shows Gini coefficients for 13 OECD countries in 2015. Australia’s Gini coefficient is around average.

    Notes and sources: see Productivity Commission 2018, Rising Inequality? A stocktake of the evidence, Commission Research Paper, figures 3.4 and 3.5.

Sustained growth has delivered significantly improved living standards for Australians at every income level

Alone among OECD countries, Australia has experienced 27 years of uninterrupted economic growth. This has delivered significantly improved living standards for the average Australian household in every income decile. The Commission report investigated whether this improvement has been shared equally among all income groups.

Income inequality

Over nearly three decades, inequality has risen slightly in Australia

Commission analyses using both ABS and HILDA data1 indicate that income inequality in Australia has increased modestly since the late 1980s, declining slightly since the global financial crisis. Most of the rise in income inequality occurred during the mining boom, when overall wages growth was strong, but increased most strongly for high income earners.

Most developed countries have also experienced rising income inequality, but at a faster pace. Australia’s level of inequality is close to the OECD country average. The fact that inequality levels are different among developed countries suggests that government policies, institutions and political environments play an important role in shaping inequality.

Taxes and transfers have consistently reduced income inequality

The Commission’s analysis showed that Australia’s progressive income tax and highly targeted transfer system substantially reduces income inequality. On average, income tax and government cash transfers (such as the age pension and family payments) reduce income inequality by about one third.

And government-funded services, such as health, education and public housing have an additional equalising effect. When these in-kind transfers are taken into account, inequality is about 30 per cent lower again than that for disposable household income. This is because people with low incomes receive the largest amount of in-kind transfers.

Measuring trends in income inequality is contested territory

  • ABS data based on the HES/SIH indicate that income inequality, as measured by the Gini coefficient, has increased slightly between 1988-89 and 2015-16. (A higher Gini coefficient indicates higher inequality). It was relatively flat through the 1990s, but shifted upwards during the mining boom and stabilised after the GFC.

    However, HILDA data tell a different story. According to HILDA, there was no clear uptick in inequality during the mining boom, and inequality has instead been fairly stable since the early 2000s.

    This discrepancy is partly due to changes in the ABS definitions of income and survey methodology introduced during the mid-2000s. The changes improved the measurement of income. But a side effect of these changes is that income estimates from HES/SIH are less comparable across years.

Different data sets show different trends in inequality

  • Gini coefficients for equivalised disposable income, HES/SIH and HILDA

    This line chart shows time series data for Gini coefficients for equivalised disposable income from the HES/SIH and HILDA datasets. The HES/SIH series runs from 1988-89 to 2015-16 and trends slightly upwards with a large jump between 2005-06 and 2007-08. The HILDA series runs from 2000-01 to 2015-16 and is essentially flat.

    Notes and sources: see Productivity Commission 2018, Rising Inequality? A stocktake of the evidence, Commission Research Paper, figure 3.2

Australia’s progressive income tax and highly targeted transfer system has a powerful equalising effect on household incomes...

  • Gini coefficients for equivalised income

    This line chart shows Gini coefficients for private income, gross income and disposable income between 1988-89 and 2015-16. The inequality of gross income is consistently lower than that of private income and the inequality of disposable income is consistently lower than that of gross income.

...and in-kind transfers from government, like education and health, substantially reduce consumption inequality

  • Gini coefficients for equivalised disposable income, private consumption and final consumption

    This line chart shows Gini coefficients for disposable income, private consumption and final consumption (inclusive of in-kind transfers) between 1993-94 and 2015-16. The inequality of private consumption is consistently lower than that of disposable income and the inequality of final consumption is consistently lower than that of private consumption.

    Notes and sources: see Productivity Commission 2018, Rising Inequality? A stocktake of the evidence, Commission Research Paper, figures 3.11 and 3.20.

Consumption inequality

While debates about inequality typically focus on income, the Commission’s report argues that consumption is arguably a better measure because it is the goods and services that people consume, not the income they earn, that contributes to their wellbeing.

The Commission found that inequality of private consumption is only slightly lower than that of disposable income, but after in-kind government transfers (such as education and healthcare) are accounted for, final consumption inequality is 30 per cent lower than that of disposable income.

Are the rich getting richer? Household incomes at the very top are trending upwards

  • A lot of recent commentary has focused on the growth of incomes at the very top of the income distribution, especially the top 1 per cent. While income growth among this group is difficult to estimate, it is possible to derive rough estimates.

    Data from the HES suggest that the share of income going to the top 1 per cent of households has risen over recent decades. In 2015-16, the top 1 per cent of income earners accounted for 5.3 per cent of total equivalised disposable income, up from 4.4 per cent in 1988-89.

    Between 1988-89 and 2015-16, the average income of this group grew by 2.8 per cent per year, significantly faster than for the top decile as a whole (2.4 per cent per year) and for the population as a whole (2.1 per cent per year).

    This rise has not been steady or continuous. HES estimates suggest that the top 1 per cent income share declined through the 1990s, but rebounded strongly in the 2000s.

    Incomes in the top 1 per cent are volatile because a relatively large share of income comes from return on capital, which is more volatile than income from labour or government cash transfers.

    While the top 1 per cent earned 5 per cent of all disposable income in 2015-16, they earned 18 per cent of all capital income (before taxes).

The importance of the top 1 per cent has increased

  • Graph a: Top 1 per cent possible income share. This line chart show the top 1 per cent disposable income share in Australia between 1988-89 and 2015-16. The share declined through the early 1990s and then rose through to 2009-10 before plateauing. Graph b: Per cent reduction in Gini coefficient if top 1 per cent are removed. This line chart shows how much the Gini coefficient for disposable income is reduced when the top 1 per cent of people ranked by income are removed from the distribution between 1988-89 and 2015-16. It follows roughly the same pattern as the top 1 per cent income share.

    Notes and sources: see Productivity Commission 2018, Rising Inequality? A stocktake of the evidence , Commission Research Paper, figure 3.8.

Economic mobility

The inequality measures considered above show a modest increase in the gap between rich and poor, but who is 'rich' and who is 'poor' can change over time. To account for this, the Commission report also examined economic mobility – the gauge of whether the rich always remain rich and the poor always poor. How does economic mobility stack up in Australia?

Life course mobility in Australia is high

Life course mobility refers to how a person’s economic position changes throughout their life. It reflects life events that affect a person’s income or wealth, but also the extent to which changes in a person’s income or wealth translate into changes in their position in the income distribution.

Almost everyone moves across the income distribution over the course of their lives

People’s incomes change over the course of their lives. As they do, people move up and down the income distribution. The Commission found that over the 16 years from 2000-01 to 2015-16, on average, each person spent time in five different income deciles. Close to 90 per cent had a difference of at least three deciles between the top and bottom income deciles they spent time in. Less than 1 per cent of people remained in the same income decile over the whole period.

This mobility indicates that income deciles do not represent a constant group of people. Over the same 16 years, the Commission estimated that 36 per cent of the population spent at least one year in the top income decile, 43 per cent spent time in the bottom decile, and about 50–60 per cent spent time in each of the other eight deciles. In other words, not only does the group of people in a particular decile change over time, but all income deciles – apart from the top and the bottom – included more than half the population at some point during the past 16 years.

People at the bottom of the income distribution tend to move up, and people at the top of the distribution tend to move down. Most people in one of the bottom four deciles in 2000-01 were in a higher decile in 2015-16, and most people in one of the top four deciles in 2000-01 were in a lower decile in 2015-16.

Life events that can have a significant influence on economic mobility include transitioning from education to work, career advancement, household formation or dissolution, having children, divorce and retirement. Life course mobility is ‘stickier’ at both the top and bottom of the distribution than in the middle – and stickiness at the bottom is of significant policy relevance.

While life course mobility affects people across the entire distribution, there is more income persistence (stickiness) at the ends of the distribution than in the middle. People in the top decile and in the bottom two deciles in 2000-01 were the most likely to be in the same decile in 2015-16. However, the likelihood that these people remained in the same decile was exceedingly low. Of those in the bottom or the second bottom decile in 2000-01, less than 2 per cent remained in that decile for the entire 16-year period, and of those who started in the top decile, about 6 per cent remained there consistently over the same period.

There is significant movement between income deciles

  • Proportion of people in the top, 5th and bottom income deciles in 2000-01, by income decile in 2015-16

    This ribbon chart shows movement between people’s income decile in 2000-01 and their income decile in 2015-16. Of note, 26 per cent of people who started in the top decile ended up there and 22 per cent of people in the bottom decile ended up there.

    Notes and sources: see Productivity Commission 2018, Rising Inequality? A stocktake of the evidence, Commission Research Paper, figure 5.5.

Intergenerational mobility appears to be at about the OECD average

Intergenerational mobility refers to the transmission of economic wellbeing between parents and their children. It is a proxy measure for equality of opportunity. Evidence suggests that Australia’s intergenerational mobility ranks around the middle of OECD countries for which comparable data are available. Non-OECD countries for which comparative data are available mostly have low or very low levels of intergenerational mobility.

Some Australians experience entrenched disadvantage

Many Australians experience economic disadvantage at some stage in their lives, but for most people, it is temporary. However, a small but significant proportion of the population experience persistent and recurrent poverty.

About 9 per cent of Australians (around 2.2 million people) are currently experiencing income poverty2, and three per cent of Australians – roughly 700,000 people – have been in income poverty for at least the last four years.

People living in single parent families, Indigenous Australians, people with low educational attainment, the long-term unemployed, and people with disabilities or other long-term health conditions are most likely to experience protracted income poverty.

Whether inequality increases or decreases in the future will depend on the opportunities people have to improve their living standards. Sustained economic growth and access to reliable employment will provide opportunities for most people. But for a smaller group, the challenges are more complex. We know that factors such as chronic disease, mental illness, addictions, long-term unemployment and poor educational outcomes, drive inequality. We also know that policy design needs to be more adaptable and targeted to individual disadvantage – a ‘handmade’ approach to policy development. But there is still a lot we don’t know. The Commission’s current inquiry into mental health is one step in identifying how we can do better for our fellow Australians.

Footnotes

  1. Australian Bureau of Statistics (ABS) Household Expenditure Survey (HES) and Survey of Income and Housing (SIH) ; Household, Income and Labour Dynamics in Australia (HILDA) Survey , initiated and funded by the Australian Government Department of Social Services and managed by the Melbourne Institute. Return to Footnote 1 in the text
  2. This includes many people for whom low incomes may be temporary, such as students in part time jobs. Return to Footnote 2 in the text

Rising inequality? A stocktake of the evidence

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