Inequality on the rise

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.

99 thoughts on “Inequality on the rise

  1. 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.

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

  3. 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.

  4. 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)

  5. 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.

  6. 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?

  7. 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”.

  8. 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.

  9. 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.

  10. 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!

  11. 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.

  12. 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.

  13. 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.

  14. 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)

  15. “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

  16. 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.

  17. 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.

  18. 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.

  19. 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.

  20. 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.

  21. 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.

  22. 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.

  23. 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.

  24. 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?

  25. 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.

  26. 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.

  27. 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/

  28. 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.

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

  30. “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.

  31. 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.

  32. 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.

  33. 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

  34. 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.

  35. 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,

  36. 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.

  37. 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.

  38. 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.

  39. 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.

  40. 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 ?

  41. 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.
    —-“

  42. 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.

  43. 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.

  44. 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.

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