Lies and statistics

Australians have traditionally prided themselves on egalitarianism. During a visit to Australia at the end of the 19th century, commentator Francis Adams observed that "in England, the average man feels that he is an inferior; in America he feels that he is superior; in Australia he feels that he is an equal".

So far, we have known little about whether early Australia lived up to this idealistic view. Because income surveys were rare during the first part of the 20th century, inequality researchers have found themselves looking through a glass, darkly.

To paint a better picture of long-run inequality, Tony Atkinson (from Oxford University) and I estimated (pdf file 162KB) the income share of the richest groups, using data from taxation statistics. While these have their shortcomings, they allow us to better understand the distribution of incomes than ever before.

In 1921, the richest 1 per cent of Australian adults earned 12 per cent of personal income, a high point for the super rich. Over the next 60 years, the trend in top-income shares headed downwards and fell sharply during the Great Depression and again during World War II (although top-income shares rose somewhat after the war).

By 1980, the top 1 per cent received only 5 per cent of personal income. Under the prime ministership of Malcolm Fraser, Australian top-income shares were at their nadir.

Over the past quarter-century, the decline has reversed itself - the shares of the richest groups grew steadily during the 1980s and 1990s. By 2002, the richest 1 per cent of Australians pocketed 9 per cent of all personal income.

The income share of the richest groups in 2002 was higher than it had been at any point since the Korean War in the early 1950s.

These trends accord with what we can glean from other sources. Relative to average earnings, the salaries of top public servants and High Court justices declined from the 1920s to the 1980s, and have since risen.

In 1992, the earnings of a typical executive in one of Australia's top 50 companies were 27 times the wage of an average worker. By 2002, a top CEO earned 98 times the wage of an average worker.

The path of top-income shares in Australia has much in common with four other Anglo-Saxon countries: Britain, Canada, New Zealand and the United States.

Each nation experienced a decline in top-income shares in the three decades after World War II, followed by a sharp rise beginning in the late 1970s or early 1980s.

What might explain the changes? Discussing changes in top-income shares in the US, Thomas Piketty and Emmanuel Saez speculate that the internationalisation of the market for chief executives and changing norms about inequality may explain part of the increase.

Taxes seem to matter too

Over the past three decades, Australia's top marginal tax rates have steadily fallen: from 69 per cent in 1970 to just 47 per cent today. In the Anglo-Saxon countries, the evidence suggests that cutting the top marginal rate increases the income share of the very richest.