Mine the gap

In 1978, US economist Henry Aaron described the study of inequality as being like 'watching the grass grow'. After becoming more equal in the immediate post-war era, inequality in most English-speaking countries had flatlined for decades.

But alas for Aarons, the grass started shooting up as soon as he spoke. Inequality in developed nations has surged over the past generation, with computerisation and deunionisation among the key drivers.

Today, something new is going on. With commodity prices nearly 4 times higher than they were a decade ago, the proverbial pet-shop galah can recite the positive impact of the mining boom on the overall economy. Yet few have stopped to consider the impact of the mining boom on Australian inequality.

Simple economic theory tells us that the mining boom is likely to have concentrated impacts. Few industries are as capital-intensive as mining, so the share of the boom that accrues to workers is significantly smaller than if the boom had been in a labour-intensive sector like education or retail. And with substantial lead-times, a run-up in prices is likely to benefit existing players more than it would in an industry that is easier to enter, like construction or cafes. Given these factors, we should expect that the splash in mining cash will go to the few, not the many.

In the sharemarket, mining stocks now comprise one-fifth of the All Ordinaries index, up from one-tenth a decade ago. In turn, shareholders have rewarded mining bosses generously. From 2003 to 2010, the pay of BHP's CEO tripled, while CEO pay increased sixfold at both Rio Tinto and Newcrest.

Indeed, what's happening at the top of the income distribution really is the big story of Australian inequality. According to taxation data, 1849 people had annual incomes over $1 million in 2001-02. In the most recent figures (for 2008-09), there were 6395 people in that income range (indeed, there were 7905 in 2007-08). Not surprisingly, Western Australians now make up a larger share of this group of annual millionaires than they did a decade ago.

The same pattern shows up in figures from the Australian Bureau of Statistics, which divides households into five income groups, and calculates the share of disposable income that each receives. By the end of the noughties, each of the bottom four quintiles had a smaller share than at the start of the decade, while the richest fifth of households had gained about two percentage points. For the first time, the top fifth of Australian households now have twice their share of national income (41 percent), while the poorest fifth of households have about one-third of their proportionate share.

Is the recent rise in inequality due to the mining boom? While it's hard to be sure, much of the objective evidence points that way. We're not seeing a growing gap between the poor and the middle – instead, modern Australian inequality is a rising gulf between the middle and the top. This is likely to manifest itself in skyrocketing prices for beachside real estate, escalating fees at elite private schools, and growing attempts to use money to influence political outcomes.

As an academic economist, one of the projects that I found most exciting was a coauthored study with Oxford University's Tony Atkinson, which looked at long-run trends in incomes of top income groups, such as the richest 1 percent. As a politician, I'm naturally drawn towards thinking about policies that provide greater equity without reducing economic growth. One such policy is to shift Australian mining from royalty taxes to a profits-based tax. When prices rise, miners will pay more tax. When prices fall, miners will pay less tax. Due to be legislated later this year, a Minerals Resource Rent Tax will raise more revenue, more efficiently. MRRT monies will be spent on regional infrastructure, boosting retirement savings (particularly for low-income Australians) and cutting company tax rates.

We can see the positive impact of the mining boom in many indicators – from capital investment to GDP growth. So it shouldn't be too surprising that the boom has probably also affected inequality. The challenge for policymakers is not to stop the boom, but to find policies that are both efficient and equitable, and help create opportunities across the society. As any sailor knows, it's the rising tide – not the tidal wave – that lifts all boats.