Measuring the income divide: how does Australia compare?

Inequality and poverty are topics widely debated, and there is a strong community perception that the gap between rich and poor is growing. How accurate is this perception, and how does Australia compare with other countries? And if the gap is growing, does it matter? This article discusses trends in income inequality in Australia over the last twenty years, and compares the Australian experience with other OECD countries.

There are several types of income. ‘Wage and salary earnings’ refers to before-tax income from work, ‘gross income’ covers before-tax income from all sources, and ‘disposable income’ refers to income after tax and social security are paid (Saunders 2001). A separate analytical issue is how income for families of different sizes should be compared. Families living together can achieve a higher standard of living on the same income per person as someone living alone, because they can share the cost of heating, rent, cooking and so on. This issue is addressed by calculating ‘equivalent household income’ based on a set of equivalence scales which vary with the size of the household and the number of children.

Studies of income inequality generally use equivalent household disposable income as the measure of income. The measure of inequality most often used is the Gini coefficient. Theoretically, this could range from 0, which would mean that income was distributed equally among all people, to 1 which would imply that one person received all income. An increase in the Gini coefficient suggests that income is becoming more unevenly distributed.

Saunders (2001) analyses recent trends in income inequality in Australia. Table 1 shows changes in the distribution of income over the last decade by presenting data on the change in Gini coefficients for different types of income.

Table 1. Changes in distribution of household weekly income 1990 – 1999/2000 Gini coefficients.

Source: Saunders (2001) - Includes only full-time workers

Clearly, there was a large increase in inequality in full-time wages – an increase of almost 23 per cent over the decade, or an average of around two per cent each year. There was a smaller but still significant increase in the inequality of the distribution of equivalent disposable income over the same period. This suggests that the tax-transfer system has played an important role in limiting overall inequality in the face of a major change in earnings inequality. These figures from an analysis by Saunders are very similar to those derived from another study by Harding and Greenwell (2001) which show an increase of 0.53 per cent per year in the Gini coefficient for equivalent disposable income over the last decade, despite some differences in data and methods.

Why has earnings inequality increased so dramatically?

A few key factors contributed to earnings inequality. There has been an increased demand for more highly skilled workers, causing the wages of this group to rise dramatically. The move to individual and enterprise bargaining has rewarded those with greater bargaining power. As women have gained better paid jobs, an even wider gap has developed between high-income households with two wage-earners and low-income households where neither partner has a job (Dawkins and Scutella 2001).

How does income inequality in Australia compare with other industrialised countries?

Figure 1 shows increases in inequality in equivalent disposable income for several OECD countries. It should be noted that the figures for Australia refer to the period 1989-1999, while the other countries cover the period from 1979 to the mid-1990s. Australia’s rate of increase in inequality exceeded all of the other countries covered by Burtless’ study (2001).

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Figure 1. Average annual increases in Gini coefficient for equivalent disposable income since 1979.

Sources: Burtless 2001, Saunders 2001 and Harding and Greenwell 2001.

Why should we be concerned about increased income inequality?

It is often argued that people on low incomes are better off even if inequality is increasing, because increased inequality is associated with higher economic growth which benefits everyone in real terms—the ‘rising tide lifts all boats’ argument. Burtless (2001) has shown that inequality has increased most rapidly in countries with the highest average levels of economic growth. There does therefore seem to be an association between increased inequality and increasing overall wealth of a country. In terms of how the wealth is shared, however, Burtless argues that the poor in European countries have done better over the last decade, despite having lower rates of growth than the UK and the USA, because the benefits have been more equally distributed.

Research from the Luxembourg Income Study supports Burtless’ argument. While acknowledging the methodological difficulties of making international comparisons, this international study of well-being examines real income differences between income groups in each country, with a particular focus on children. It does this by adjusting income for purchasing power—what someone can buy for a given amount of money in their own country. Importantly, it allows us to explore the question ‘Is someone on a particular income (measured as a point in the income distribution) in Australia better or worse off in absolute terms than someone on an equivalent income in other countries?’

The answer depends on whether you are rich or poor. Children of the rich in the USA (belonging to a family at the 90th percentile of the income distribution) are better off in terms of purchasing power than the children of the rich in any other country. Australia comes in at about the middle. For the children of the poor (a child in a family at the 10th percentile of the income distribution) the story is the opposite. Poor children in the USA are worse off in real terms than poor children in all of the other 12 OECD countries in the study, except for the UK. Australia comes 11th out of 13: only in the UK and the USA are the poor worse off than in Australia. These findings mirror those of the United Nations Development Programme (UNDP) on poverty rates in developed countries where Australia comes 14th out of 17 countries, followed only by the UK, Ireland and the USA (UNDP 2001).

Incidentally, why do Australian policy makers and economists tend to turn for ideas on combating poverty to the two countries which seem to be worse at it than we are—the UK and the USA? Perhaps it is time to think outside the directions encouraged by language barriers or shared neo-liberal doctrines.

Implications

These findings about inequality have significant implications for policy concerning people on low incomes. We must find ways to distribute the benefits of growth more equally rather than continue down the ‘high growth–high inequality’ road promoted by economic and political elites. Not only will this make Australia a fairer country, it will also make people on low incomes better off in real terms. And we must start looking for lessons on combating poverty to European countries who have demonstrated a superior capacity for reducing it than our English-speaking counterparts.