Home > Economic policy > Inequality on the rise

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. August 25th, 2006 at 11:56 | #1

    This is another way of saying that there should be equality of outcome, without equality of exertion?

  2. Terje (say tay-a)
    August 25th, 2006 at 12:50 | #2

    This is another way of saying that a whole swag of people are doing really well.

  3. August 25th, 2006 at 13:25 | #3

    No, Steve. I think what Prof Q. is trying to say is that the working class will rise up and crush their oppressors in violent revolution, pouring well deserved retribution onto evil men and women who for centuries now have stolen the very daily bread of those least able to defend themselves.

    Or maybe he was just pointing out one of our country’s economic outcomes, touching on a few of the reasons behind it and expressing an opinion about the effect on that outcome of the government’s current employment policies.

    I’m not sure. One of those two things, anyway.

  4. zoot
    August 25th, 2006 at 14:08 | #4

    Comprehension’s not your strong suit, is it Steve?

  5. August 25th, 2006 at 14:33 | #5

    Why yes Steve. Everyone should be paid exactly the same wage (to the cent) regardless of how much work they do. Including dogs.

  6. snuh
    August 25th, 2006 at 15:03 | #6

    in steve’s defence, my recollection of the hawke years was a period in which everyone was paid the same, regardless of skill, effort or education.

    on the other hand, i was 3 years old when he first took the job.

  7. August 25th, 2006 at 15:10 | #7

    Comprehension is fine Zoot, I was being a bit snarky that’s all.

    Snuh has a point, at that time the dole was a viable financial alternative (for the bone idle) to a chef apprenticeship. Long term prospects of a chef apprenticeship not being taken into consideration (there is a segment of the population who are incapable of thinking beyond Friday)

  8. sdfc
    August 25th, 2006 at 15:57 | #8

    Steve

    The only point Snuh seems to have been making was that children have very little knowledge of anything outside their own little world. Sort of like you.

  9. Stephen L
    August 25th, 2006 at 18:02 | #9

    Loath as I am to abmit that steve at the pub has a point about anything, there is a genuine question as to how much inequality is acceptable.

    I believe that inequality is already too high in Australia, and it getting worse is therefore a serious BAD THING as 1066 would say. However, given that communist ideas of complete equality have proved unviable is there a way for progressives to determine where we should be aiming at – for example, what is the lowest level of inequality in any developed nation?

  10. August 25th, 2006 at 18:28 | #10

    Stephen L, the Scandinavian countries are generally regarded as having the lowest levels of inequality, and they have a higher GDP per capita than we do. We could do a heck of a lot worse than look at their models.

    The first thing we should do is completely ignore any more pleadings from the uber-wealthy for tax relief, usually under the guise of “making us more internationally competitive”.

  11. conrad
    August 25th, 2006 at 22:09 | #11

    What about similar calls by the non uber-wealthy for tax relief? Young single people come to mind as a group that is over-taxed and not especially rich, despite having the excitement of having to pay back debts for a poor quality education that many of us got for free.

  12. SJ
    August 25th, 2006 at 22:50 | #12

    Stephen L Says:

    I believe that inequality is already too high in Australia, and it getting worse is therefore a serious BAD THING as 1066 would say. However, given that communist ideas of complete equality have proved unviable is there a way for progressives to determine where we should be aiming at – for example, what is the lowest level of inequality in any developed nation?

    StephenL, take a look at this recently posted graph at Club Troppo.

  13. August 26th, 2006 at 06:56 | #13

    A good question Stephen L, but there is another important question before the “what is the right level of wealth/income inequality” question. And that is — “is there a correct level of wealth/income inequality?”

    I say no. Wealth/income inequality is an outcome. What I think is important is that we follow a just process and then accept whatever outcome comes from that. If there is x,y or z level of inequality, then so be it.

    I think a just process is one where each individual owns themselves and the product of their own labour… and all activities (including trade) are undertaken voluntarily without theft, coercion or fraud. Freedom is a crazy idea in this day and age… but somebody has to believe in it!

  14. Terje (say tay-a)
    August 26th, 2006 at 07:36 | #14

    Bobert,

    Norway has north sea oil. I think they can have a socialist system because they are rich, rather than being rich due to their system. Norway is also only about 4 million people in close proximity to the mass markets of Europe. They are a white monoculture that eats whale meat. I don’t think their system represent some form of social breakthrough.

    Regards,
    Terje.

  15. conrad
    August 26th, 2006 at 08:41 | #15

    This is a good point John H, that far to few people realize. A good example of it is that 50% (or whatever the number is now) of apprentices drop out before completing their trade courses. A similar phenomena can be found in the university system, where the amount people expect they need to learn to get their degree appears to have been on the slow decline for quite some time (with universities only too happy to oblige and employers then only too happy too complain). I don’t see how the government can be blamed fully for either of these two output effects (even though it often is) since some part of it is clearly not due to an input effect of government but due to the cultural attitudes of individuals entering into such education.

  16. August 26th, 2006 at 10:22 | #16

    John Humphreys,

    So if “freedom”, as you define it, 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?

    Outcomes are important, and anybody that claims otherwise is living in fantasyland, whether that particular fantasyland is libertarian, socialist, or of another breed entirely. GDP, Gini coefficients, and their ilk certainly aren’t everything, but they are certainly not nothing.

  17. conrad
    August 26th, 2006 at 12:40 | #17

    That is a contrived example Robert. Maybe you haven’t noticed it, but freedom and prosperity are strongly positively correlated. Can you name a country high on a freedom scale where the average person is destitute (let alone 90%) ? It isn’t very hard to think of countries low on a freedom scale in the reverse position. It also isn’t hard to think of countries where giving even small amounts of freedom to the average citizen has lead to greater overall prosperity (e.g., China)

  18. still working it out
    August 26th, 2006 at 14:24 | #18

    “Norway has north sea oil. I think they can have a socialist system because they are rich, rather than being rich due to their system. Norway is also only about 4 million people in close proximity to the mass markets of Europe. They are a white monoculture that eats whale meat. I don’t think their system represent some form of social breakthrough.”

    Scandaniavia also includes Sweden, Iceland, Finland and Denmark. As you can see below all of those countries are doing better than Australia economically. Most of those countries have considerably less in the way of natural resources than Australia.
    GDP per capita

    Country _________________ Rank
    Iceland ($53,472) ____________ 3
    Denmark ($48,000) ___________ 6
    Sweden ($39,658) ____________ 9
    Finland ($37,014) ____________ 12
    Australia ($34,714) ___________ 17

  19. Tony Healy
    August 26th, 2006 at 14:52 | #19

    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.

    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.

  20. Ernestine Gross
    August 26th, 2006 at 15:23 | #20

    Neat, conrad. ‘Freedom’ and ‘prosperity’ are two words for which there does not exist (to the best of my knowledge) well defined theoretical frameworks with definitions of concepts and propositions that lend themselves to empirical examination.

    You speak of “Small amounts of freedom”. What are you talking about? 2 cups? 1 cup of freedom? Can I have my quantity of ‘freedom’ wrapped in sliver paper, please?

    You say: “Strong positive correlation between freedom and prosperity…” What are you talking about? Would you please write down how you calculate the correlation?

    If one considers mainstream economics concerned with non-dictatorial resource allocation systems (eg general equilibrium theory), one finds that one of the conditions under which a solution to the theoretical model exists is a ‘minimum wealth constraint’ for each individual.

    Yep, conrad, if this minimum wealth constraint is not fulfilled, then the logic of the model forces the thinking person to acknowledge that the word ‘choice’ also goes out the window.

    But, conrad, it seems to me your modus operandi requires ‘emotional intelligence’. I apologise to you for not having sufficient ‘emotional intelligence’ to sympathise with or ‘embrase’ your ….? Well, I don’t really know how to call what you are offering.

  21. conrad
    August 26th, 2006 at 17:06 | #21

    Ernesting, obviously freedom has many facets, but are you saying that there is a definition that people would accept that would put, say, Congo ahead of Australia? In addition, if you don’t think that the average CHinese citizen is more free than, say, 1970 (and hence “small amounts of freedom”), and that this change has been beneficial, then you obviously have a different idea of freedom to me.

  22. conrad
    August 26th, 2006 at 17:10 | #22

    Incidentally Ernstine, here is a list of countries as ordered by an economic freedom measure

    http://www.heritage.org/research/features/index/countries.cfm

    are you saying that I wouldn’t get a positive correlation with a measure like GDP?

  23. conrad
    August 26th, 2006 at 17:11 | #23

    Sorry, I meant negative correlation.

  24. Ernestine Gross
    August 26th, 2006 at 17:25 | #24

    conrad, I am saying to the best of my knowledge, your views may find a home with people who value ‘emotional intelligence’. They are wasted on me.

  25. Tony Healy
    August 26th, 2006 at 19:27 | #25

    Conrad, you seem to be saying that inequality is justified as it’s a result of freedom. You cite national comparisons of economic freedom. Yet if you look at international comparisons of inequality, you see that inequality correlates with poor economic performance, not good.

    In fact, one of the lessons of successful Western democracies is that all parties in the economy must compete. That includes employers competing for labour, and politicians competing for votes.

  26. Fred Argy
    August 27th, 2006 at 09:08 | #26

    This debate about inequality is fascinating but we will never agree as economists on whether present levels of inequality are too high or on what should be done policy-wise about it. The reason is that, within a wide range, there is no clear relationship between scale of redistribution (or inequality levels) and economic performance. So the argument about how much to redistribute is mostly about values and ideology (and incidentally individual freedom is a goal shared by Right and Left – they just define it differently!). And that has nothing to do with economics.

    So what is the role of economists in this field? First, if governments decide they want to reduce inequality, economists can advise on the best METHODS of redistribution. Secondly, they can advise, in conjunction with other disciplines, on just processes – how to legitimise redistribution. Thirdly, they can try to understand what “mainstream� Australia thinks and use that as a basis for policy.

    My limited research tells me that methods of redistribution are crucially important in determining the economic efficiency cost – which is why I find Nordic policies interesting. As for Australian attitudes, polls indicate they want to see a strong welfare safety net in place but they are not terribly interested in reducing inequality of outcomes per se. What does come through strongly in all opinion polls is that most Australians believe everyone should have an equal chance to succeed in life provided they do everything to help themselves. This is what they mean by “fair go� and “have a go�. The interesting thing about this finding is that it is good economics (as well as fair) to ensure everyone has a fair go. Additional equality of opportunity generates wonderful economic spin-offs.

    Against this background, I have sought to understand if there is genuine equality of opportunity in Australia – and found it wanting. Policy action is needed – not more passive welfare but more active social investment. If anyone is interested, you can read my Australia Institute discussion paper no. 85 on the subject.

  27. Ken
    August 27th, 2006 at 09:11 | #27

    I think that the popularity of forcing the long term unemployed back into the workforce is based on the false notion that we are talking about mostly otherwise productive people who are just too lazy to get jobs. The reality is these are largely the concentrated few percent who have trouble coping, lots of mentally ill, (plenty who are undiagnosed as such), people who just can’t sustain cncentrated efforts in any regard and make costly mistakes as a consequence (most of all to the detriment of themselves and those around them). There are those who are lack interpersonal skills to the extent that they are almost always picked last for anything or not picked at all. Low self esteem, poor education and behavioural problems.
    I hope that someone does add up the costs of upping the pressure on so many people who already find it hard to cope because the simplistic one sided view being promoted by our current leaders is careful to ignore the costs and consequences. How many extra suicides? How many ending up mental hospitals, in courts and gaols? How big a ripple will flow out from these?
    The popularity of that emotion based response that comes with seeing people who are apparently getting something for nothing being forced to do hard labour relies on not looking too deeply at the real people involved or the real social consequences of taking away support from so many people who are probably never going to be successful at supporting themselves.

  28. Fred Argy
    August 27th, 2006 at 09:24 | #28

    This debate about inequality is fascinating but we will never agree as economists on whether present levels of inequality are too high or on what should be done policy-wise about it. The reason is that, within a wide range, there is no clear relationship between scale of redistribution (or inequality levels) and economic performance. So the argument about how much to redistribute is mostly about values and ideology (and incidentally individual freedom is a goal shared by Right and Left – they just define it differently!). And that has nothing to do with economics.

    So what is the role of economists in this field? First, they can advise on the best methods of redistribution – if governments decide they want to reduce inequality. Secondly, they can advise, in conjunction with other disciplines, on just processes – how to legitimise redistribution. Thirdly, they can try to understand what “mainstreamâ€? Australia thinks and use that as a basis for policy.

    My limited research tells me that methods of redistribution are crucially important in determining the economic efficiency cost – which is why I find Nordic policies interesting. As for Australian attitudes, polls indicate they want to see a strong welfare safety net in place but they are not terribly interested in reducing inequality of outcomes per se. What does come through strongly in all opinion polls is that most Australians believe everyone should have an equal chance to succeed in life provided they do everything to help themselves. This is what they mean by “fair go� and “have a go�. The interesting thing about this finding is that it is good economics (as well as fair) to ensure everyone has a fair go. Additional equality of opportunity generates wonderful economic spin-offs.

    Against this background, I have sought to understand if there is genuine equality of opportunity in Australia – and found it wanting. Policy action is needed – not more passive welfare but more active social investment. If anyone is interested, you can read my Australia Institute discussion paper no. 85 on the subject.

  29. taust
    August 27th, 2006 at 09:38 | #29

    Is there a correlation between size of social benefits and the number of people recieving the benefit? Put another way does the number of people with a given disadvantage increase as the payment for that disadvantage increases?

    Is there any evidence to support the view that back say in the 1950′s or other period when inequility was ‘high’ the social stabilty (youth problems etc etc) was higher or lower than when inequility was relatively speaking lower.

    If in fact there is no evidence for good social outcome with equility what actually changes outcomes?

  30. Fred Argy
    August 27th, 2006 at 11:26 | #30

    This debate about inequality is fascinating but we will never agree as economists on whether present levels of inequality are too high or on what should be done policy-wise about it. The reason is that, within a wide range, there is no clear relationship between scale of redistribution (or inequality levels) and economic performance. So the argument about how much to redistribute is mostly about values and ideology (and incidentally individual freedom is a goal shared by Right and Left – they just define it differently!).

    This does not mean economists have no role to play. There are at least four legitimate roles for them. First, they need to continue to examine the unresolved relationship between inequality and economic performance. Secondly, and related to the first point, economists can examine why some instruments of redistribution are more economically benign than others. Thirdly, they can try to understand what “mainstream� Australia thinks and if there is a gap between expectations and reality, use that as a basis for policy.

  31. August 27th, 2006 at 12:54 | #31

    Fred,

    Good points. But I’m not an economist, and I think the present research clearly shows several things that are of interest to the body politic:

    a) that income and wealth inequality is rising on a global scale, with much of the benefits of economic growth going to an exceedingly small fraction of the population.
    b) that income and wealth inequality is higher in the English-speaking countries, and particularly the United States, than it is in other rich countries, and
    c) the empirical evidence that we need to accept higher inequality to achieve economic growth is pretty thin.

  32. August 27th, 2006 at 14:01 | #32

    If the wealth & income of the bloke on the bottom is rising, does it really matter to him if the inequality gap is increasing?

  33. jquiggin
    August 27th, 2006 at 16:39 | #33

    Steve, while this is true for Australia so far, in the US, wealth and income at the bottom hasn’t risn’t significantly for decades. And that’s where we’re headed/

  34. conrad
    August 27th, 2006 at 16:56 | #34

    Robert,

    I don’t know what data you are referring to about inequality, but, on a global scale, hundreds of millions of people have come out of poverty in Asia in the last decade or so, so the benefits of economic growth are not simply going to an exceedingly small minority. No doubt some rich people got richer, but many poor people did as well, even in countries like China where income inequality has increased. If you want to factor in things not included in individual wages (like schools, roads and other infrastructure), then the benefits of economic growth for poor people in many of these countries have been even wider.

  35. taust
    August 27th, 2006 at 18:03 | #35

    Is it true that because of their on average longer lifespans than men, women finish up owning a very high proportion of the wealth?

  36. MichaelH
    August 27th, 2006 at 19:05 | #36

    “If the wealth & income of the bloke on the bottom is rising, does it really matter to him if the inequality gap is increasing?” – satb

    This is one of routine defences of inequality.

    But being a relative measure, trying to answer it quantitatively doesn’t work so well. That those at the bottom may be (and that really is a maybe – higher wages, but decreased job security, increased ed. costs, medical costs, transport costs etc) improving their lot is good, but it can’t address the problem of relative difference.

    JQ’s point is on the money. The other important factor, is mobility. Someone earlier pointed to the Scandanvian countries. They are a useful example here as well. Not only do they have low inequality they have high mobility. The ‘bottom’ can strive for the top. The US model prides itself on just this – “opportunity” (mobility), but surprisingly rates well below European countries on this score. So not only is there geater inequality, but exacerabating this, low mobility.

    This appears to be the direction the Fed. Govt. would like to take us.

  37. Dan
    August 27th, 2006 at 20:08 | #37

    Out of curiosity, MichaelH, do you know where I can find a study on international comparative mobility? I have occassionally come across those which claim America has higher mobility than Europe but they are usually dated and always come from suspect sources.

    I know here in Canada, the wealth inequality has also risen with wages flat for all but the top quintile (just like the US) over the last decade. Inequality is not as high as the US, but our median income is the same. Given our 20%+ per-capita GDP difference, America’s greater wealth is not apparent to most people.

    I find the moral defense of inequality to be a bit strained. Does one really believe the poor suddenly became lazy while the wealthy have worked much harder?

    Steve at the Pub ironically sounds a lot like the communists – they recognized it is unfair to work harder for the same pay, so they measured each job and set pay relative to how hard workers performed. Capitalism paid based on supply/demand, and allowed work-free gains such as capital appreciation – exertion is not what differentiated the wealthiest.

    The Economic Freedom Index always seems to mislead people. In no way does their measure of “Freedom” favor inequality. The highest scoring nations on the list often have the highest taxation relative to GDP (aka: wealth redistribution) in the world. The components of high FDI, low inflation, low black market, strong legal protection, etc are simply the results of being a rich country.

  38. Tony Healy
    August 27th, 2006 at 20:26 | #38

    Barbara Ehrenreich, the journalist who went undercover to experience low wage life in America, really nails it in these comments on PBS:

    Here’s a simple theory of poverty: It’s not a psychological condition. It is, above all — a consequence of shamefully low wages and lack of opportunity for anything else.

    …no matter how carefully I pinched pennies I couldn’t get my wages to cover basic expenses….

    Now if there’s one thing that’s really demoralizing, it’s working hard and not making enough to live on.

  39. ansteybranchopolous
    August 27th, 2006 at 21:04 | #39

    its great to see the private schools doing their bit to maintian and increase inequaility – Hailebury College in Melbourne is in the poo for poaching talented students from nearby state schools to advanc etheir image and attract ever more stupid prideful parents – all under the banned of a religion based on the raves of a dirt poor carpenter who ended up as dead on a stick

  40. August 28th, 2006 at 01:20 | #40

    Conrad,
    I’d agree WRT developing countries to a reasonable extent (but I have to say that a lot of the good press out of China and India ignores the fact that the vast majority of the population are still dirt-poor).

    But in Australia and particularly the United States, the benefits of economic growth are going disproportionately to the already wealthy.

  41. Fred Argy
    August 28th, 2006 at 08:18 | #41

    Apologies to everyone. I thought my first two posts had not registered so I posted a third and shorter one. And you poor people ended up with all three! Senility is creeping up on me,

  42. Andrew
    August 28th, 2006 at 09:55 | #42

    Frankly, I’d hate to live in a society where everyone is equal – how boring would that be? Brings mental images of Huxley’s Brave New World.
    If everyone was truly equal – where’s the incentive to try harder?
    It’s been one of the big social changes in the past 20 years – the gradual repudiation of socialism by the average punter. Howard’s so-called aspirationals 20 years ago would have been calling for centrally controlled wealth re-distribution, today they are cheering the high-achievers on because they aspire to be one themselves.

  43. August 28th, 2006 at 10:53 | #43

    Is it true that because of their on average longer lifespans than men, women finish up owning a very high proportion of the wealth?

    No. Women have, on average, lower lifelong earnings and crap super because they are more often the primary carer of children.

  44. August 28th, 2006 at 10:54 | #44

    Andrew, that’s a straw man. Neither John nor anyone else on this comments thread has proposed such a thing here. The point is that inequality is increasing, and a small group on the absolute top of the pile are the ones getting the biggest slice of the fresh economic growth pie. If you want to make an argument that this increased inequality is a good thing, or not significant, feel free. But stop attacking arguments nobody has actually made.

    As to your contention about the aspirationals, I’d find that slightly more convincing if the Howard government wasn’t throwing money hand over fist at them with first home buyers grants, family tax benefits, baby bonuses and the like.

  45. Andrew
    August 28th, 2006 at 12:17 | #45

    Robert, I’m not attacking anything. I’m just putting forth my view. And I don’t think it is a straw man, many of the comments here are talking about inequality as if it’s a bad thing. My proposition is that inequality is a good thing – because the alternative (equality) is worse.
    On your point about Howard throwing money at the aspirationals – yes I agree, that’s a bad thing, Howard’s behaving like a socialist. I wish he’d stop throwing my tax money at all that middle class welfare.

  46. taust
    August 28th, 2006 at 12:18 | #46

    Following up Fred A’s point about active welfare in order to provide equality of opportunity to succeed. Could we come up with a liist of the barriers (institutional and otherwise) to equality of opportunity.

    First on my list (and I would guess first on everyones) is education.

    Is there any evidence for the last say 50 years that what we have done/are doing in education has increased equality of opportunity?

    My guess is that the statistics on the access of lower social economic groups to upward mobility through education would show that we are doing no better now than 50 years ago (although of course the job descriptions earning the higher and lower wages may have changed.)

    If I am right what is the bottleneck(s) in the education system that has prevented an increase in social mobility through education ?

  47. taust
    August 28th, 2006 at 12:47 | #47

    Helen;
    whilst not at odds with your explanation The report I have given an extract of shows on my reading that while children are a definite wealth hazard being married and living longer does even up the situation.

    Accounting for Wealth Differences in Australia
    Gary N. Marks1,2
    1. Melbourne Institute for Applied Economic and Social Research,
    University of Melbourne
    and
    2. Australian Council for Educational Research

    Extract
    “———
    As expected on average women have less wealth than men. The estimate from the first model is
    that women on average have 30 per cent less wealth. This declines slightly to 24 per cent when
    controlling for education since for the general population men still have higher levels of
    education than women. However, when controlling for marital status, number of children and
    marital history there was no significant gender difference in wealth. This suggests that the lower
    average wealth of women is due to low levels of wealth of single parent families, ninety percent
    of which are headed by women, rather than gender differences in occupational status and
    income. Indeed, when controlling for employment factors, women’s wealth is greater than
    men’s. This is because among married who are or have been married or in a de facto relationship
    a sizable proportion of household wealth is due to their spouse’s labor market activities.
    —-“

  48. Fred Argy
    August 28th, 2006 at 13:38 | #48

    Taust, in my discussion paper I refer to barriers to employment, education, health and housing – all of which disadavantage low income people. On education specifically, the barriers are inadequate early childhood education, widening disparities between public and private secondary schools, lack of vocational and employer training, a growing digital divide etc.,

    There is already evidence of widening socio-economic education outcomes and my prognosis in the paper, based on the americanisation of policy in Australia and the relatively poor performance of the US on income mobility, is that it will get worse. If you want to know my reasons please read the paper.

  49. conrad
    August 28th, 2006 at 15:39 | #49

    Robert, it just isn’t true that economic growth has been mainly beneficial to an extremely small minority in recent times. A quick google search gives this result for median income earners from 1996-2003.

    http://www.abs.gov.au/AUSSTATS/abs@.nsf/ProductsbyCatalogue/A8775332423EC0C6CA256E4D0074347D?OpenDocument

    As you can see, those on the median income (i.e., the majority of wage earners) have had an overall increase in wages above inflation. Thus lots of people are better off, and not just those right at the top.

  50. Razor
    August 28th, 2006 at 16:10 | #50

    I have always liked what I think was called the Microsoft Dilema when income inequality was studied at University. In the Australian context we could call it the Macquarie Bank Dilema. Say Macquarie moved their headquarters from Sydney to Orange for some reason. The proportion of millionaires and high income earners in the region would improve dramatically. Income and wealth inequality would also increase significantly. Who would be worse off? No one.

    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.

  51. Fred Argy
    August 28th, 2006 at 16:13 | #51

    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.

  52. Ernestine Gross
    August 28th, 2006 at 17:12 | #52

    Razor,

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

  53. Razor
    August 28th, 2006 at 17:37 | #53

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

  54. Ernestine Gross
    August 28th, 2006 at 18:11 | #54

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

  55. August 28th, 2006 at 18:16 | #55

    “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.

  56. Razor
    August 28th, 2006 at 18:24 | #56

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

  57. August 28th, 2006 at 18:36 | #57

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

  58. Razor
    August 28th, 2006 at 18:44 | #58

    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.

  59. taust
    August 28th, 2006 at 21:58 | #59

    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?

  60. Ernestine Gross
    August 28th, 2006 at 23:50 | #60

    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?

  61. Terje (say tay-a)
    August 29th, 2006 at 08:35 | #61

    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.

  62. Fred Argy
    August 29th, 2006 at 08:54 | #62

    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.

  63. taust
    August 29th, 2006 at 11:23 | #63

    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.

  64. Razor
    August 29th, 2006 at 11:43 | #64

    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.

  65. Ernestine Gross
    August 29th, 2006 at 13:51 | #65

    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.

  66. Razor
    August 29th, 2006 at 14:36 | #66

    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’?

  67. August 29th, 2006 at 14:58 | #67

    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.

  68. Terje (say TAY-A)
    August 29th, 2006 at 15:24 | #68

    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.

  69. August 29th, 2006 at 19:19 | #69

    “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.

  70. jquiggin
    August 29th, 2006 at 21:45 | #70

    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.

  71. August 29th, 2006 at 22:02 | #71

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

    Let me repeat: SHOCKED

  72. Terje (say TAY-A)
    August 29th, 2006 at 23:44 | #72

    through = throw

  73. August 30th, 2006 at 07:03 | #73

    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.

  74. August 30th, 2006 at 07:17 | #74

    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.

  75. Jemima
    August 30th, 2006 at 08:47 | #75

    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.

  76. conrad
    August 30th, 2006 at 11:31 | #76

    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.

  77. August 30th, 2006 at 13:59 | #77

    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.

  78. taust
    August 30th, 2006 at 17:12 | #78

    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.

  79. Terje (say tay-a)
    August 30th, 2006 at 17:12 | #79

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

  80. August 30th, 2006 at 20:38 | #80

    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

  81. taust
    August 31st, 2006 at 07:19 | #81

    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.

  82. gordon
    September 1st, 2006 at 11:47 | #82

    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.

  83. taust
    September 1st, 2006 at 12:24 | #83

    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?

  84. gordon
    September 1st, 2006 at 12:29 | #84

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

  85. gordon
    September 2nd, 2006 at 10:50 | #85

    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.

  86. gordon
    September 2nd, 2006 at 12:28 | #86

    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.

  87. Fred Argy
    September 2nd, 2006 at 16:50 | #87

    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).

  88. gordon
    September 2nd, 2006 at 18:21 | #88

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

  89. taust
    September 2nd, 2006 at 21:39 | #89

    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).

  90. gordon
    September 4th, 2006 at 10:52 | #90

    Taust, your link is broken.

  91. taust
    September 4th, 2006 at 20:02 | #91
  92. gordon
    September 5th, 2006 at 12:50 | #92

    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.

  93. taust
    September 6th, 2006 at 08:24 | #93

    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.

  94. gordon
    September 6th, 2006 at 12:49 | #94

    Taust, can’t argue with that.

  95. taust
    September 6th, 2006 at 15:53 | #95

    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.

  96. gordon
    September 10th, 2006 at 09:54 | #96

    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).

  97. Public Access
    September 14th, 2006 at 13:25 | #97

    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?

  98. taust
    September 15th, 2006 at 14:36 | #98

    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?

  99. gordon
    September 16th, 2006 at 09:58 | #99

    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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