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Inequality on the rise

August 25th, 2006

Andrew Leigh points to ABS data showing increasing inequality in both wages and disposable income since the mid-1990s. This is scarcely surprising for a number of reasons. First, our poor performance in education means that the supply of educated workers has not kept up with the long-run trend increase in relative demand for such workers, so the equilibrium wage differential has increased. Second, IR reforms over the last decade and the decline in union membership would both be expected to increase wage inequality. Finally, whereas tax-welfare policy under the Hawke-Keating government generally offset the effects of increasing inequality in market incomes, the reverse has been true under Howard.

Looking at overseas experience, particularly the US, UK and NZ we can expect a whole lot more inequality once Workchoices takes effect.

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  1. Fred Argy
    August 28th, 2006 at 16:13 | #1

    Conrad, a rise in nominal median wages of 3.3% per annum over recent years translates into a real wage increase of just over 1% per annum. This is not bad – but it is below real GDP per capita growth. Andrew Leigh has shown that between 1995-6 and 2003-4, median real wages per hour rose by around 1.5% per annum and by half that at the 10th percentile – whereas hourly real wages at the top end have increased by nearly 2%. So wage inequalities have increased.

    You are perfectly right to say that everyone got something out of economic growth under Howard, but it is also true that the preponderant gains have been at the upper end and, as John reminded us, the small gains by low paid workers occurred under a quite different industrial relations regime to the one we are now in (which will increasingly penalise them). So expect the gap to widen. That per se would not worry me if I felt it was all merit-based – but alas the evidence suggests this is not so because of the barriers to income and ocupational mobility at the lower end.

  2. Ernestine Gross
    August 28th, 2006 at 17:12 | #2

    Razor,

    What is your concept of wealth and how would you measure wealth?

  3. Razor
    August 28th, 2006 at 17:37 | #3

    Wealth is Assets minus Liabilities – a fairly straightforward concept I would have thought.

  4. Ernestine Gross
    August 28th, 2006 at 18:11 | #4

    Razor, How does ‘labour’ (including academic labour) fit into your accounting measure of owner’s equity?

  5. August 28th, 2006 at 18:16 | #5

    “You are perfectly right to say that everyone got something out of economic growth under Howard, but it is also true that the preponderant gains have been at the upper end”

    Who cares? The only people who care about that sort of thing are envious socialists like Fred.

    Inequality is a good thing, because inequality means there’s a reason to keep trying.

    One of your fellow socialists – Oliver Stone – put it much better than I ever could:

    The point is, ladies and gentlemen: Greed, for lack of a better word, is good. Greed is right; greed works. Greed clarifies, cuts through, and captures the essence of the evolutionary spirit. Greed, in all of its forms, greed for life, for money, for love, knowledge — has marked the upward surge of mankind

    Inequality is the carrot that saves us all from being beat with the stick.

  6. Razor
    August 28th, 2006 at 18:24 | #6

    Labour does not fit into a measure of owner’s equity and it shouldn’t. What is the point you trying to make?

  7. August 28th, 2006 at 18:36 | #7

    I think Ernestine is channeling Clive Hamilton, but he’s being so obtuse it’s hard to be sure.

  8. Razor
    August 28th, 2006 at 18:44 | #8

    Must have his hair shirt on.

    thought your pre-emptive strike apology was outstanding – except you didn’t apologise pre-emptively for pre-emptive strikes.

  9. taust
    August 28th, 2006 at 21:58 | #9

    Fred;
    having re -read your paper I see the statement of the reasons but no evidence that these barriers have increased.

    Would it be valid to say :
    1. inequality as measured by income distribution;wealth distribution;and social mobility have not changed significantly in the last 30 years.
    2 the availabilty of early childhood education ; health have improved over the same period and the availablity of employment has cycled.

    Why has social mobilty apparantly not changed as these active factors have changed in intensity?

  10. Ernestine Gross
    August 28th, 2006 at 23:50 | #10

    Razor, you wrote some rather amazing words, namely:

    “The focus on inequality is a socialist red herring covering the greed and jealousy of the academics and journalists who are too lazy and incompetent to build income and wealth themselves.�

    Surely, you would agree that anybody who is not intellectually impoverished would like to know the foundation of your pontification. So here we have it:
    1. You said: Wealth is defined as Assets minus Liabilities. (I assume you mean the monetary values).

    2. You agree that your measure of wealth corresponds to the accounting definition of ‘owners’ equity’. (Confirms my assumption in 1)

    3. Hence, in your model of the economy: ‘wealth = owners’ equity’. (You did not answer the question on income. I assume you agree that income is defined as owners’ equity at balance date t=1 – owners’ equity at balance date t=0).

    4. You said: ‘labour’ (including academic labour) does not fit into a measure of owners’ equity. Interesting. Don’t you know that ‘labour’ (including academic labour) is a ‘cost item’ in financial accounting? Hence, given your concept and measurement of wealth, the only way ‘labour’ (including academic labour) can create ‘wealth’, as defined by you, is if their incomes are reduced! Maximum wealth, as defined by you, would correspond to zero wages.

    For your information, your concept and measurement of wealth was created in 1494 by a mathematician by the name of Pacioli, a monk. At the time his work was published as a contribution to algebra. Lazy and incompetent monk, eh – creates wealth for others but fails to profit himself. Why shouldn’t he suffer insults from people like you who use his work without paying a cent in rent?

    Did I miss content in your pontification?

  11. Terje (say tay-a)
    August 29th, 2006 at 08:35 | #11

    One major concern with rising inequality is that before long it gets repackaged as a statement about rising poverty, even if poverty is declining. We then have to put up with rhetoric about capitalism creating poverty.

    Of more interest to me is the factors that impede those at the bottom from improving their situation. Two issues that most people seem to agree are problems are:-

    1. An income tax free threshold that cuts out at A$6000.

    2. Punitive EMTRs for those in transition from welfare to work (ie supply side incentive effect).

    Whilst I think that there is quite broad concensus on these issues, I doubt there is broad concensus on what to do about it.

  12. Fred Argy
    August 29th, 2006 at 08:54 | #12

    Thanks taust for your perceptive observations.

    You are right: on the limited evidence available, income mobility is high and showing no clear trend in Australia. But longitudinal mobility statistics lag behind the underlying trends in inequality of access. When you look at the these underlying trends you start to worry. For example, my paper points to some evidence that education scores being achieved by kids from poorer neighbourhoods are slipping further behind those from more affluent areas (p. 33) and that “the health divide is widening (p.39).

    But in truth, my paper is much more concerned about the future (with the steady americianisation of Australian social and economic policy) than the past. My argument is that Australia has combined moderate free market policies with passive and active redistribution. Both have contributed to mobility. We are now entering an era where free market policies are much more radical and active redistribution through social investment more constrained. This is likely to lead us down the US road of declining mobility relative to other countries. I hope I am wrong. It won’t happen quickly and I won’t be around to see the full effects.

    Yobbo, stick to the issues and arguments. Labelling people “envious socialists” is not helpful to debate.

  13. taust
    August 29th, 2006 at 11:23 | #13

    Fred;

    I am even more worried that we appear to have no control over social mobility (as a proxy for equality) at all.

    i agree with you that at the very least the educational prospects of the socially disadvantaged are no better now than say 30years ago. Yet we have vastly improved the resources purportedly addressing this issue.

    This looks to be another case like improving the prospects for aboriginals where we can alter policies through 180 degrees but have little effect.

    When that happens one starts to ask áre we asking the right question’. Until we ask the right question we will not get to a correct answer except by chance.

  14. Razor
    August 29th, 2006 at 11:43 | #14

    Ernestine,

    1. Of course I know labour is a cost item.

    2. Your little word games about ‘Labour’ only being able to create wealth by being reduced to zero is not reflected in the wealth created in modern society – give me some hard evidence of your proposition.

    Imagine I am a Nobel laurete Economics Professor. I get divorced and the wife takes me down for every red cent. At the start of the year I have nothing except a few personal possessions. Over the year I earn $1 million in income from various sources. I give $400,000 back in taxes and spend $200,000 on living. At the end of the year I have $400,000 in the bank. hey presto – wealth created and I didn’t need to reduce my labour cost to zero.

    Now explain exactly how your proposition worked.

    While it has been sometime since I studied micro-economics, I recall that an individual or firm will seek to maximise marginal Revenue, or minimise marginal cost, or something along those lines – rather than seek the Maximum wealth target that you used.

    As for poor old Pacioli, I’m no intellectual property lawyer, but I don’t think IP patents etc go for much longer than 50 years after death, or something like that.

  15. Ernestine Gross
    August 29th, 2006 at 13:51 | #15

    Razor,

    1. Well, if you now remember that ‘labour’ is a cost item in financial accounting, why didn’t you work out the implications for your concept of wealth and your measure of wealth?

    2. I did not play a little word game. I told you already that I was skeptical about your pontification and I used a cost efficient method to put it to the test.

    The pontification in question is:

    “The focus on inequality is a socialist red herring covering the greed and jealousy of the academics and journalists who are too lazy and incompetent to build income and wealth themselves.�

    It failed the test. Side-tracking does not help.

  16. Razor
    August 29th, 2006 at 14:36 | #16

    Ernestine, you earnest model maker you said –

    “You did not answer the question on income. I assume you agree that income is defined as owners’ equity at balance date t=1 – owners’ equity at balance date t=0″

    To start with – there was no clear question from you about income.

    Also, your owners equity equation is profit, not income/revenue, and retained profits are assets, which are wealth.

    How on earth does plain old accounting measures of wealth prove test my opinion on why cetain people decide to focus on ‘inequality’?

  17. August 29th, 2006 at 14:58 | #17

    Ernestine,
    You seem to have confused several issues here. “Labour” is a cost item for the purchasers of that labour – i.e. the employers of the people providing it. For them, it is an accounting expense, which, if properly used, can produce profits – that is to say wealth.
    For the people actually able to provide labour, the ability to do it is an asset. The revenue earned from actually doing it is a realisation of at asset – normally termed “revenue” in accounting speak. Like employers, this can produce wealth.
    I would suggest some clarification from you, either of your terminology or your thinking.

  18. Terje (say TAY-A)
    August 29th, 2006 at 15:24 | #18

    Razor & Andrew,

    If I understand EGs point it is specfically in response to:-

    academics and journalists who are too lazy and incompetent to build income and wealth themselves

    In essence so long as these people (Academics and Journalists) earn wages they are building wealth for themselves, just as any other worker builds wealth for themselves by selling their skills or muscle.

    I think the bit quoted above by Razor was a pointless through away line designed to generate more heat than light. I would not waste too much energy trying to defend it.

    Regards,
    Terje.

  19. August 29th, 2006 at 19:19 | #19

    “Yobbo, stick to the issues and arguments. Labelling people “envious socialistsâ€? is not helpful to debate. ”

    Your side of politics lost the argument 30 years ago Fred. The only reason you continue it is because you hate the rich. My comment is just a reflection of that fact.

  20. jquiggin
    August 29th, 2006 at 21:45 | #20

    Yobbo, I repeat what Fred said. This kind of thing doesn’t help discussion, and it particularly doesn’t help your side of the debate.

  21. August 29th, 2006 at 22:02 | #21

    Im shocked, SHOCKED that you would jump to his defense.

    Let me repeat: SHOCKED

  22. Terje (say TAY-A)
    August 29th, 2006 at 23:44 | #22

    through = throw

  23. August 30th, 2006 at 07:03 | #23

    Robert Merkel asks: So if [freedom] resulted in 90% of the population periodically suffering famine, as long as they were retaining all the products of their own labour, would you be happy with that?]

    No.

    However, I note that we weren’t discussing poverty or famine here, but inequality. Poverty and inequality aren’t the same thing. This is a very unfortunate but very common confusion.

    I note, for example, that if we double everybody’s income then we decrease poverty but increase inequality. I think that doubling all income (cet par) is a good thing.

  24. August 30th, 2006 at 07:17 | #24

    Tony Healy Says: Conrad (and John Humphries), I support freedom too, and I argue that freedom includes the freedom to be rewarded for work, effort and skills. Freedom also includes the freedom to have access to food, shelter and happiness, where those things are available.

    Of course, I can’t tell you how to use language… but I find yor use of “freedom” more confusing than helpful. If freedom includes the freedom to take “food, shelter, happiness” or anything else with force, then this is inconsistent with freedom from force under the rule of law.

    I agree that food, shelter and happiness are good things to have, but I suggest that they are outcomes while freedom is a process. And as a process the only choice is voluntarily or involuntary.

    It is worth repeating that freedom is (of course) not the only moral good. The other obvious one is utility, which includes outcomes such as access to food, shelter and other good things like education, health care, a nice car etc.

    But if we are going to start using the word “freedom” for everything then we will hide more than we will reveal in our discussions.

    Tony again: One of the issues with “inequality� is that it often results from activities that deprive others of the right to fair return for their work, and to freedom.

    This returns the discussion again to “process” instead of “outcome”. I would suggest that as long as the process is voluntary (what I call freedom) then nobody is being deprived of their natural right to freedom. By definition.

    While good outcomes (utility) is a good thing, I can’t see how anybody can claim it as a right as it cannot exist without it being produced by somebody. Provision of sufficient food, shelter, cars etc do not exist naturally and so cannot be natural rights.

    Not that it matters — but my surname is Humphreys. Not Humphries.

  25. Jemima
    August 30th, 2006 at 08:47 | #25

    Some fawn over wealth not caring to wonder how it was gotten or whether those with it had much motivation beyond greed. To give the worshippers the hint they’re looking for: you make money by trying hard to supply as many people as you can with what they desire. Go to it.

    Others here recognise that what people want and what they need are different things and that there’s something shameful and stupid in applauding the mere accumulation of wealth. We can be sure that the genuinely deserving rich like say Warren Buffett and maybe Bill Gates have no time for the barrackers and worshippers you hear so much useless noise from, either.

  26. conrad
    August 30th, 2006 at 11:31 | #26

    John H:

    I don’t see why “freedom” isn’t scientifcally definable as a construct like any other — all you need to do (in fact, you don’t need to do it, as other people already have) is define the core concepts and find a reliable way of measuring them (and hence we get measures of economic and social freedom). There are obviously going to be grey areas that people don’t agree on, and different measures of “freedom” are going to get slightly different results, and similarly, people might not believe in the measure at all (perhaps it is just the by-product of other things), but this is no different to any other construct whether psychological (e.g,. intelligence), or other (e.g., type of political system). In addition, if the the lay-persons definition of freedom is quite similar across people, and isn’t too different to a definition that one might construct after a reasonable analysis (and I presume that is true for at least the bottom end of the scale –what it means not to be free), I think it should be fine to use the term. I thought the general basis of your initial definition was relatively straightforward in its interpretation, so I wasn’t sure what the fuss was about.

  27. August 30th, 2006 at 13:59 | #27

    Perhaps you’re about to delete this response because it doesn’t comply with your “requirements” .

    For a long time now, Howard etal. has extolled the real wage increases of some 16% for the lowest deciles since he came to office. Just to remember that sixteen percent of bugger-all, is still bugger-all.

    The last time I looked, we all pay the same price for petrol , and GST means that the more you pay, the more you pay.

  28. taust
    August 30th, 2006 at 17:12 | #28

    Public Access
    re your concerns over the GST. What concerns have you over a Carbon Tax?I if a crbon tax is effective, it will at least double the cost of energy
    I would hazard a guess that the lower paid spend a high proportion of their income on energy or services with a high enery input.

  29. Terje (say tay-a)
    August 30th, 2006 at 17:12 | #29

    By that logic a fall of 16 percent would be bugger all.

  30. August 30th, 2006 at 20:38 | #30

    Thank you JQ for allowing the post.

    to Taust: We all breathe the same air; any increased cost incurred due to mitigation of climate change will fall most acutely on the poor. Without incentives, landlords will not insulate nor install efficient heating/cooling. Funny that.

    Edited – don’t push your luck – JQ

  31. taust
    August 31st, 2006 at 07:19 | #31

    So now not only are the poor going to experince the effects of climate change to a higher extent than the rich, experience the carbon trading “tax’ to a greater extent, but also experience higher rents as landords either improve the houses (or stop renting).

    i am reckon it may be rougher to be poor under these policies

    nonetheless there is hope as the cost of energy goes up the relative price of human brawn will come down. The poor have traditionally been worked to an early death by providing the brawn, but at least they will get arelatively higher wage while doing it.

    I suppose one can look upon it as a return to our cultural.

  32. gordon
    September 1st, 2006 at 11:47 | #32

    Here’s some overseas experience from the US (NYTimes 30/8/06) based on the 2005 Census Report:

    �For the other 91 million households [ie the 91m. households not headed by someone over the age of 65], the median [income] dropped, by half a percent, or $275. Incomes for the under-65 crowd were hurt by a decline in wages and salaries among full-time working men for the second year in a row, and among full-time working women for the third straight year. In all, median income for the under-65 group was $2,000 lower in 2005 than in 2001, when the last recession bottomed out.

    Despite the Bush-era expansion, the number of Americans living in poverty in 2005 — 37 million — was the same as in 2004. This is the first time the number has not risen since 2000. But the share of the population now in poverty — 12.6 percent — is still higher than at the trough of the last recession, when it was 11.7 percent. And among the poor, 43 percent were living below half the poverty line in 2005 — $7,800 for a family of three. That’s the highest percentage of people in “deep poverty� since the government started keeping track of those numbers in 1975.�

    The “growth floats all boats� crowd seem to be losing the PR war if this para. from the same article is any guide:

    “The Census findings are yet another indication that growth alone is not the answer to the economic and social ills of poverty, income inequality and lack of insurance. Economic growth was strong in 2005, and productivity growth was impressive. What have been missing are government policies that help to ensure that the benefits of growth are broadly shared — like strong support for public education, a progressive income tax, affordable health care, a higher minimum wage and other labor protections.�

    The article is here.

  33. taust
    September 1st, 2006 at 12:24 | #33

    In looking at the data one gets the feeling that we are seeing the development of three économies’in salaries;

    the salaries for jobs that are not significantly traded in the global economy eg academics, lawyers; social consultants etc etc;

    salaries for jobs that are traded in the world economy but for which demand for skilled people is in more or less balance with supply and;

    salaries for jobs that are in the world economy but where supply of people able to do the job exceeds demand for such people.

    Now given that Australia is a small regional economy (on a Global scale) we probably have limits to the proportion of people who have occupations effectively protected from global competition so we should not aim to increase the first category of employment.

    Hence our only overall course of action which will increase the median salary is to promote people out of the occupations where the supply of labour exceeds demand.

    The usual solution is to increase access to education. However I would need to be convinced that barriers to access to education are significant in this context.

    The major barrier appears to be in motivating people to take up the challange given they have what appears to be well founded fears that it is hopeless to try.

    So the problem (IMO etc) is how to give people in no jobs or poverty pay jobs rational expectations that it is possible to improve their lot given current availability of resources. to effect the change.

    An associated problem for solution is how to we give young peopleat risk of forming the no pay or low pay cohort, rational expectations of a better life than that offered by the drop out an live culture?

  34. gordon
    September 1st, 2006 at 12:29 | #34

    Dan, don’t despair, I’ll try to find some social mobility refs. for you. Give me a day or two.

  35. gordon
    September 2nd, 2006 at 10:50 | #35

    Dan, here are some mobility references, in no particular order.

    Corak’s “Poor Children, Poor Adults” is here. There is also a book: Corak, M. (ed.) Generational Income Mobility in North America and Europe (CUP, 2004)

    Blanden, Gregg and Machin’s “Intergenerational Inequality in Europe and North America” is downloadable from here.

    An article from The Economist is here.

    A report by T.Hertz (Centre for Americal Progress) is summarized (with link to full report) here.

    Aaronson & Mazumder’s “Intergenerational Economic Mobility in the US 1940-2000″ is downloadable from here.

  36. gordon
    September 2nd, 2006 at 12:28 | #36

    Dan, Left Business Observer had an article on mobility in No. 84 (July 1998). I can’t find the article online but the bibliography is here.

  37. Fred Argy
    September 2nd, 2006 at 16:50 | #37

    I reviewed much of the evidence on social mobility, drawing on many of the references noted by Gordon, in my recent Australia Institute paper ‘Equality of opportunity in Australia – myth and reality”, discussion paper no. 85. Unfortunately, the Institute has a charge (I think 20 or 30 dollars).

  38. gordon
    September 2nd, 2006 at 18:21 | #38

    Dan, before I sign off on this issue, have a look at Krugman here.

  39. taust
    September 2nd, 2006 at 21:39 | #39

    A similar debate in the USA.

    http://cafehayek.typepad.com/hayek/2006/08/catering_to_ign.html.

    I will leave it to professional economists to come to a landing.
    My own view is that four angels can sit on the tip of a needle made in the USA (if any are still made there).

  40. gordon
    September 4th, 2006 at 10:52 | #40

    Taust, your link is broken.

  41. taust
    September 4th, 2006 at 20:02 | #41
  42. gordon
    September 5th, 2006 at 12:50 | #42

    Taust, pins and needles made in the USA seem, from your link, to amount to the difference between income and wages. A series of real median family income derived from the US Census linked from here seems to indicate that the median family income in the US declined from the year 2000 onwards.

  43. taust
    September 6th, 2006 at 08:24 | #43

    Gordon;
    I must admit I kept loosing the overall view of the argument in the important points of detail being made by the various posters; differences between mean mode and median income with and without benefits etc.
    Then there was the discussion on whether the large number of illegal immigrants depressed the income statistics and that meant that the income of USA citizens had indeed risen.

    The collective noun for a group of academic economists is a dispute of economists and for commercial economists is a consensus.

  44. gordon
    September 6th, 2006 at 12:49 | #44

    Taust, can’t argue with that.

  45. taust
    September 6th, 2006 at 15:53 | #45

    Gordon;
    thanks for the links.

    Mmy uninformed take would be that inequality of income has not changed very much for the bulk of the USA population.

    This conclusion would lead onto saying that all the gains in productivity have been captured by the increase in materialistic quality of life. eg faster computers, mobile phones , ipods etc.

  46. gordon
    September 10th, 2006 at 09:54 | #46

    Taust, I don’t understand what “…inequality of income has not changed very much for the bulk of the USA population� means. Are you referring to numbers in poverty?

    The idea that productivity gains are reflected in increased quality of goods sold at the same real prices seems to strike a chord of memory. I think Henwood’s “After the New Economy” had some things to say about it. Actually, I think Prof. Quiggin has had some things to say about it, but I can’t find the archive reference. I think the technical name is “hedonic pricing”.

    From memory, there are great difficulties comparing the quality of things available today with an earlier period when they weren’t available at all, and the issue is largely confined to electronics anyway. I remain impressed by the disparity between productivity gains and pay rates, often discussed by the Economic Policy Institute (eg. here and here).

  47. Public Access
    September 14th, 2006 at 13:25 | #47

    An article by Clive Crook in the September issue of THE ATLANTIC MONTHLY, conjures up an image of inequality in the USofA today.
    Where would you fit in?

    From the street: To turn a $9/kg tomato into a $3/kg tomato, just remove the stem and the label. Enjoy!

    A rhetorical question. What IS the price of a local $Au telephone call?

  48. taust
    September 15th, 2006 at 14:36 | #48

    Gordon,
    I am an amateur playing in a professional game. However some thoughts.

    Because of the increase in two income families, household income has increased. Similarly because of the decrease in number of children per household, household potentially disposable income must have increased. So at the household income level disposal income may been increasing rapidly. Could this effective increase in income” shift the supply demand price curve for labour?

    If we reduce the unemployment rate and/or increase the participation rate would the newly employed have on average lower income sufficent to lower the average?

  49. gordon
    September 16th, 2006 at 09:58 | #49

    This is an exercise in what Prof. Quiggin used to call “slow blogging”!

    An article by Krugman summarised at Economist’s View here agrees with you that “Because of the increase in two income families, household income has increased…” for the long time series 1973-2005. The shorter time series 2000-2005, however, (referred to in my comment of 1/9/06 above) apparently shows a decline. I can’t speculate on effects of unemployment and participation rates.

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