Is Inequality Increasing?
Presentation for Parliamentary Library Vital Issues Seminar, 10
October 2012
Peter Whiteford, Crawford School of Public Policy
peter.whiteford@anu.edu.au
Background and outline
• This presentation is primarily descriptive – what has happened
to income inequality in Australia over recent decades, and
what factors appear to be associated with these trends.
• Data and methods; measures of inequality
• Situating Australia internationally
• Income inequality: trends and driving forces
• Redistribution through taxes and benefits
• Discussion and conclusions
Data and methods
•
•
•
•
•
•
Data are from ABS income surveys from 1981-82 to 2007-08 and in some cases 2009-10. The
ABS has changed and improved income measures over time; for consistency we use the
“unimproved” income measure, showing lower inequality after 2005-06, but effects on earlier
trends uncertain.
Income measure is current weekly income of income units (nuclear family), adjusted for household
size using “revised OECD equivalence scales”.
Income is made up of market income (earnings, self-employment, investment and property
income, private transfers); the addition of transfers from government (social security benefits) or
privately (e.g. child support) produces gross income; direct taxes are deducted to estimate cash
disposable income.
Interpreting changes as result of government policy decisions is problematic e.g. unemployment
rose rapidly between time of 1981-82 Income Survey and election of Labor government in March
1983; declines in welfare receipt after 2000 partly reflect 1995 reforms (raising pension age for
women, phasing-out dependency payments).
There are also long-term “cohort effects” - e.g. rising educational attainment of women and
increase in female labour force participation; declines then increases in employment of older
workers.
Some important policy changes not fully captured in cash disposable incomes e.g. reintroduction
of Medicare, extension of superannuation, introduction of GST. However, policy trade-offs
accompanying these changes may be incorporated e.g. wage restraint under Accord.
How is inequality measured?
•
•
•
What inequalities are we interested in or concerned about – inequality of
income, inequality of opportunity, inequality of wealth?
Inequality is often thought of as disparities or gaps – what is the distance
between a low income and a high income household, or what is the ratio of
their incomes, e.g. what is the gap between the richest 10% and the poorest
10% (decile) or the richest and poorest 20% (quintile)?
– A lot of inequality is at the extremes, i.e. within the richest and poorest
income groups
The measure of inequality most commonly used is the Gini coefficient, which
varies between zero – when all households have exactly the same income
and one – when one household has all the income. Preferred because it is
calculated for everyone in the population.
– In 2003 the Gini coefficient for Australia was 0.301 and the 90/10 ratio was around
4 to 1; in the USA, the Gini was 0.381 and the 90/10 ratio was about 6 to 1; in
Denmark the Gini was 0.232 and the 90/10 ratio was 2.7 to 1. The ratios of the
average incomes of the top decile to the average incomes of the bottom decile
were 4.6 to 1 (Denmark), 7.2 to 1 (Australia) and 16 to 1 (USA).
Level of inequality in OECD countries
2005
2008
Change in inequality, OECD countries,
1995 to 2007-08
Change in Sen welfare index, OECD
countries, 1995 to 2008
Change in real mean household income adjusted for inequality
70%
60%
50%
40%
30%
20%
10%
0%
-10%
-20%
Change in real GDP, Australia and selected
OECD countries, 2008 to 2011
Q4 2007=100
110.0
105.0
100.0
95.0
90.0
85.0
80.0
Australia
Canada
France
Greece
Iceland
Ireland
Japan
New Zealand
United Kingdom
United States
Median Australian households have fared
extremely well 1998=1
Australia
USA
Trends in income inequality in Australia,
1981-82 to 2009-10
Gini coefficient
Annual
0.4
0.38
0.36
0.34
0.32
0.3
0.28
0.26
0.24
0.22
0.2
Current
Revised
Working age
Trends in income inequality (Gini coefficient) among
households with a head aged 65 years and over,
Australia, 2000-2001 to 2009-10
Couples 65 and over
Singles 65 and over
0.4
0.38
0.36
0.34
0.32
0.3
0.28
0.26
0.24
0.22
0.2
2000-2001
2002-03
2003-04
2005-06
2007-08
2009-10
Patterns of income growth by decile and
period, Australia, 1981-82 to 2007-08
Average annual percentage change in real equivalent income unit income,
working age
10.0%
9.0%
8.0%
7.0%
6.0%
5.0%
4.0%
3.0%
2.0%
1.0%
0.0%
1
2
3
1982 to 1996
4
5
6
1996 to 2003
7
8
2003 to 2007
9
10
Trends in income inequality in different income
components among working age income units,
Australia, 1982 to 2007-08
Concentration coefficient
0.44
0.42
0.4
0.38
0.36
0.34
1982
1984
1986
1988
1990
Male earnings
1992
1994
1996
Female earnings
1998
2000
2002
Family earnings
2005
2007
Earnings have grown with rising employment
Annual average real change in earnings by deciles of income unit income
Women
30.0%
1982 to 1996
Men
30.0%
1996 to 2007
1982 to 1996
1996 to 2007
25.0%
25.0%
20.0%
20.0%
15.0%
15.0%
10.0%
10.0%
5.0%
5.0%
0.0%
1
2
3
4
5
6
7
8
9
10
0.0%
1
2
3
4
5
6
7
8
9
10
-5.0%
14
Trends in income inequality in different income
measures among working age income units,
Australia, 1982 to 2007-08
Market
Gross
Disposable
0.42
0.42
0.45
0.43
0.42
0.41
0.39
0.39
0.42
0.41
0.41
0.40
0.39
0.40
0.37
0.35
0.33
0.35
0.33
0.33
0.31
0.29
0.30
0.29
0.35
0.35
0.34
0.31
0.30
0.29
0.35
0.31
0.30
0.34
0.30
0.34
0.31
0.35
0.32
0.27
0.25
1982
1990
1994-95
1995-96
1996-97
2000-01
2002-03
2003-04
2005-06
2007-08
Reduction in inequality among income units of
working age, Australia, 1982 to 2007-08
Point difference in Gini coefficient
Transfers
Taxes
0.14
0.12
0.1
0.08
0.06
0.04
0.02
0
1982
1990
1994-95
1995-96
1996-97
2000-01
2002-03
2003-04
2005-06
2007-08
Change in real value of transfers (2008 $pw)
received by deciles of working age income units
1982 to 1996-97
1996-97 to 2007-08
80
64.89
60
51.97
40
33.54
24.223.34
20
13.74
13.36
10.52
1.24
8.87
3.05
4.91
0.39
2.81
0
1
2
3
4
-3.28
5
6
7
-0.28
8
-1 9
10
-3.57
-20
-27.97
-40
-38.01
-60
17
Change in working age income support
recipients, 1996-97 to 2009-10
% of households by age group
1996-97
2007-08
2009-10
45
38.1
40
35
30
22.7
25
20.5
20
15.5
15
10
9.5
18.2
17.6
17
12 11
17.4
14.4
11.8
13.6
9.4
20.9
1010.8
5
0
15-24
25-34
35-44
45-54
55-64
Working age
Joblessness is a major source of inequality
in Australia
•
•
•
•
•
Earnings represent around three-quarters of total pre-tax household
income, the largest single component.
In 1983, a full-time worker at the 90th percentile earned 2.0 times as much
as a worker at the 10th percentile- this disparity increased to 2.3 in 1996, 2.5
in 2004, and 2.8 in 2009-10.
In 1982 a working-age family at the 90th percentile earned 112 times as
much as a family at the 10th percentile – this disparity reduced to 56 times
as much in 1996 and 49 times as much in 2009-10.
When social security benefits are added in, this disparity was reduced to 9.8
times as much in 1982, 10.2 times as much in 1996 and 11.4 times as
much in 2009-10.
Taxes reduced the disparity to 8.0 to 1 in 1982, 7.5 to 1 in 1996 and 9.6 to 1
in 2009-10.
Poverty in a time of prosperity
Payments for single person as % of median equivalent income
Average tax rates (%) by deciles of household
income, 1982, 1996-97 and 2007-08
1982
1996-97
2007-08
35.0%
30.0%
25.0%
20.0%
15.0%
10.0%
5.0%
0.0%
Decile 1
Decile 2
Decile 3
Decile 4
Decile 5
Decile 6
Decile 7
Decile 8
Decile 9
Decile 10
Income measures and concepts are important
•
Inequality is lower the longer the time period over which it is measured:
–
•
Broader measures of resources also suggest lower inequality:
–
–
•
Between 2001 and 2009 the Gini coefficient ranged between 0.306 in 2000, 0.300 in 2003,
0.312 in 2007 and 2008 and 0.299 in 2009; inequality over a two-year period varied between
0.286 and 0.295; inequality over a four year period varied between 0.273 and 0.282;
inequality over the 9 years was 0.263. Before 2009 longer term measures showed increasing
inequality.
Taking account of non-cash benefits (health, education, community services) even after
subtracting indirect taxes reduces inequality. For example, the 90/10 ratio for disposable
income in 2009-10 was 3.94 to 1, but for “final income” it was 2.64 to 1 – but up from 2.48 to
1 in 2003-04.
Adding imputed income from housing reduces the Gini coefficient in 2009-10 from 0.328 to
0.309 – but still shows increasing inequality (0.277 in 2003-04 and 0.290 in 2005-06).
Inequality is mainly reduced by raising the bottom not reducing the top:
–
–
Direct taxes and cash transfers increase the incomes of the 10th percentile by 231% and
lower the income of the 90th percentile by 19%;
The net effect of Indirect benefits and taxes is to raise the 10th percentile by a further 50%
and raise the 90th percentile by 1%.
22
Assessing income inequality trends
•
•
•
•
•
Trends in inequality differ by time period, income components and income measures.
Thus, there is no single trend, but the complex interaction of multiple influences.
Market income inequality rose in period of Labor government, mainly reflecting higher
joblessness and wider wage dispersion. Disposable income inequality rose
significantly less (about 1/3 as great), reflecting both transfer and tax changes. Real
market incomes fell for the second, third and fourth deciles, but these declines were
offset by increases in social security benefits.
Despite increasing wage dispersion, market income inequality fell from 1996-97 to
2007-08, mainly because of increased family earnings, particularly for women.
Capital income inequality rose significantly after 2003, but insufficient to offset lower
inequality in earnings.
The effectiveness of the tax system in reducing inequality was stable in the 1980s and
early 1990s, but reduced after 1996. Average tax rates fell most for the highest decile
(about 4 percentage points).
The effectiveness of the transfer system in reducing inequality increased by about
40% in the period of the Labor government, but fell back to its original level by 200708. This does not necessarily reflect explicit policy change, but rising earnings among
lower income groups lead to a scaling back of income support, heightened by
indexation of key benefits to prices.
What are the drivers of inequality in Australia?
•
•
•
•
Wage inequality has increased steadily from early 1980s onwards.
Trends differ significantly by time period – in the early 1980s and again in
the early 1990s median income growth was very slow and there was a
hollowing out of the middle class – gains being highest at the top and bottom
of the income distribution. Much of the increase in inequality was offset by
taxes and transfers – and more so if account is taken of non-cash benefits
and indirect taxes.
From the mid 1990s to the great recession income growth was very high by
historic and international standards – Australia had the highest income
growth at the median of any country apart from Ireland. All income groups
had large real income increases, but the richest did best. Taxes and
transfers reduced inequality less effectively than in the mid 1990s. Even
though market income inequality fell, disposable income inequality rose.
After 2008, incomes fell somewhat and inequality fell, mainly due to large
declines in incomes from property and investments at the top of the income
distribution. The various household stimulus packages were very
progressive, as was the large increase in age pensions
24