Inequality

The Productivity Commission Rising inequality? A stocktake of the evidence report comments

Over nearly three decades, inequality has risen slightly in Australia 

In all societies some inequality occurs due to differences in ability, opportunity, effort and luck. Institutional and policy constructs can add to this, or detract from it. 

Moreover, excessive inequality and entrenched disadvantage can erode social cohesion and hinder growth. It can also sap investment in education and skills and slow productivity growth. Yet there is no precise causative relationship, let alone a consensus on how much inequality matters. It is a topic that continues to draw diverse and competing views. 

This study does not directly enter these debates. Rather, its purpose is to contribute a foundation to an informed discussion on inequality and its social impacts, bringing together and taking stock of the latest and most complete evidence measuring the level of and trends in inequality, poverty and disadvantage in Australia via multiple means. 

While comprehensive, this study is not exhaustive; other studies examine geographic, racial or gender inequality. 

Even this modest level of ambition is not without its challenges. No single metric is sufficient to give a definitive answer to the seemingly straightforward question: have inequality, poverty and disadvantage in Australia risen, fallen or remained steady in recent years? 

Our focus, therefore, eschews the specific and often self-serving use of any one measure of inequality. Instead we use an array of indicators that examine the distributions of household incomes, consumption and wealth, their composition and importantly, movement within the distributions over time, and in response to life events, such as transitions to work, divorce and retirement. For poverty and disadvantage our approach goes beyond the standard metrics, giving weight to measures that capture the experience of those households in the bottom part of the distribution.

The broader context for this study has been an evident reduction in global income inequality and poverty since the late 1980s, the time-frame we most often apply. At the same time, however, there has been rising inequality within many developed countries. We review the Australian experience, which is less dire than some would have it, but not exemplary.

Sustained growth has delivered significantly improved living standards for the average Australian in every income decile

What also distinguishes Australia from most other developed countries has been its unprecedented 27-year period of uninterrupted economic growth, prompting many to ask how the economic gains from growth have been shared. While growth is no guarantee against a widening disparity between rich and poor, we show that it has delivered for the average Australian household in every income decile significantly improved living standards. This is in contrast with the United States (which had a similar rate of increase in income inequality as Australia) where the distribution is much more uneven, with income growth in the lower deciles about a quarter of that for Australian households.

What matters more than economic growth for understanding trends in inequality are the sources of income growth (labour, capital and transfers). These fluctuate in ways that sometimes favour those on high incomes and sometimes favour those on low incomes. For example, the mining boom was a period that favoured high income earners and capital income, lifting measures of inequality. In contrast, the post-Global Financial Crisis period has benefited lower income groups, despite weak overall growth in labour income. Among the various forces acting on inequality and poverty, the one constant that matters is having a job.

Over recent decades income growth rates by age group have also varied substantially, but for the most part, the variation reflects overall trends in the strength of income growth. That is, when the economy is strong, all age groups tend to benefit from higher income growth and when the economy is weak, all age groups tend to experience lower income growth. But at different times, some age groups have benefited more or less than others. Most recently, young people’s incomes have grown relatively slowly. On average, however, each new generation has earned more income than the last at a given age, and reaches the same level of income earlier in life.

Examining more closely the demographics of the income distribution provides additional insights. We know for example that Australians in their prime working years are more likely to be in the middle and upper income deciles, whereas over-65 year olds are over-represented in lower income deciles, reflecting retirement and reliance on the Age Pension. We also know that individuals living in households where no person is in paid work are strongly concentrated in the lower deciles, especially if there are dependent children in the household. Similarly, households with dependent children and two or more income earners are over-represented in middle and upper income deciles, and working households without dependent children tend to be over-represented at the top of the distribution.

Australia’s progressive tax and highly targeted transfer systems substantially reduce inequality 

Another clear message from the data is that Australia’s progressive tax system and highly targeted transfer system substantially reduce income inequality. Income tax and government transfers have typically lowered the measure of overall income inequality (the Gini coefficient) by 30 per cent, an equalising effect that far outweighs the overall increase in the measure since the late 1980s. This equalising effect has fluctuated over time, but overall there has been no material change in the past thirty years. Redistributive tax policies can, however, also have unintended negative consequences on economic efficiency, for example, inciting a reduction in labour supply. 

While income is usually given prominence in debates about inequality, how evenly consumption is distributed is often a better measure, as consumption contributes most directly to wellbeing. Moreover, income patterns alone do not capture the importance of in-kind transfers from government, such as health, education, childcare subsidies and government housing. These in-kind transfers have an additional equalising effect, because people with low incomes (and households with children) receive the largest amount of in-kind transfers. When the more expansive measure of final consumption is used, overall inequality (the Gini coefficient) is about 30 per cent lower again than that for disposable household income. In-kind transfers can also bear on future inequality by opening doors to greater opportunities and lifting incomes later on. 

The distinction between income and consumption comes out most strongly in analysis by age. For example, while 25 to 34 year olds are over-represented in upper deciles for income, they are over-represented in lower deciles for final consumption. This reflects reduced reliance on the education and health system in this age group, as well as higher rates of savings. On the other hand, those aged 65 or older, who are strongly over-represented in lower deciles for income, are under-represented in lower deciles for final consumption. 

The distribution of wealth is relevant too. Household welfare depends not just on resources at a point in time, but over time as well, and wealth provides a sense of financial security. Wealth can also provide an important safety net for older Australians, many of whom have relatively low incomes but high wealth, in terms of managing aged care costs and longevity risk. 

Similar to income, growth in wealth has been spread widely across the population. On average, households in all but the bottom decile experienced real increases in wealth, predominantly in housing assets and superannuation balances over the past fifteen years. However, with the growth in wealth strongest in the upper deciles, some measures of wealth inequality have risen. While wealth distribution in Australia somewhat predictably is more unequal than income or consumption, Australia’s wealth distribution remains less skewed than in other countries. Among 28 OECD countries, Australia ranks eighth most equal, as measured by the Gini coefficient of wealth. 

The fact that inequality levels are so different among developed countries hints strongly at the scope for policies, institutions and political environments to shape inequality. 

Economic mobility is high in Australia, with almost everyone moving across the income distribution over the course of their lives … 

The standard inequality measures considered thus far give a snapshot of the distribution at a point in time. While they show some widening of the gap between households, that does not mean that the rich and the poor households at the beginning and the end of the period are the same households. 

The distinction is important because a society with a given level of inequality, and where household incomes are static over time, faces different and more serious policy challenges than a society with the same level of inequality but where household incomes are mobile. There are two types of mobility: intergenerational mobility and life course mobility. Intergenerational mobility refers to the relationship between a person’s economic position and that of their parents, and life course mobility refers to changes in a person’s economic position throughout their life. The limited timeframe of Australian longitudinal data limits our capacity to assess intergenerational mobility. Instead, we present original analysis on the degree of life course mobility in Australia using the HILDA dataset. In other words, how much people move across the distribution for income or wealth from year to year. 

It turns out that almost everyone moves across the income distribution over the course of their lives. Over a 16-year period, the average Australian was classified in five different income deciles; and for less than one per cent of people, the decile to which they belonged remained unchanged over the whole period. And nine per cent spent time in both the top and the bottom income decile. A lower, but still significant level of mobility was also apparent across the wealth distribution. This highlights the fluid nature of income and wealth: over time, any given decile consists of a different group of people — most of the people in the top decile today were not there fifteen years ago. 

Life events — such as transitioning from education into work, career advancement, household formation, having children, divorce and retirement — underpin some of the observed trends in economic mobility. Typically, income rises during the working years, though this can be interrupted by childbearing and other life events, such as ill health. Similarly, Australians accumulate wealth in their middle years, and draw on this wealth in retirement when their earnings drop. These changes in income and wealth allow people to ‘smooth’ their consumption. 

… but some Australians experience entrenched economic disadvantage 

While life course mobility affects households across the entire distribution, the ends of the distribution are ‘stickier’ than the middle. Households in the top and bottom two income deciles at the beginning of the period were the most likely to be in the same decile fifteen years later. About three per cent of households were stuck in one of the bottom two deciles throughout the period. Stickiness at the ends of the distribution is indicative of some entrenched inequality. 

Accordingly, the last chapter of this study updates earlier Commission research on the nature and extent of deep and persistent disadvantage in Australia. Disadvantage is a multidimensional concept that can take the form of low economic resources (poverty), inability to afford the basic essentials of life (material deprivation) or being unable to participate economically and socially (social exclusion). Because the elements of disadvantage encompass a diverse range of indicators, it is difficult to reach a single conclusion about the overall trend in disadvantage. 

Many Australians experience economic disadvantage at some stage in their lives, but for most, it is temporary. About nine per cent of Australians (2.2 million people) experienced relative income poverty (income below 50 per cent of the median) in 2015-16, with children and older people having the highest rates of relative income poverty. This aggregate figure has fluctuated since 1988-89 but, despite 27 years of uninterrupted growth, has not declined. Persistent and recurrent poverty affects a small, but significant proportion of the population. About three per cent of Australians (roughly 700 000 people) have been in income poverty continuously for at least the last four years. People living in single-parent families, unemployed people, people with disabilities and Indigenous Australians are particularly likely to experience income poverty, deprivation and social exclusion. For people in these circumstances, there is an elevated risk of economic disadvantage becoming entrenched, limiting their potential to seize economic opportunities or develop the skills with which to overcome these conditions. 

These risks are particularly elevated for children living in jobless households, which is a group that has stood out among the multiple measures of inequality and disadvantage. How the future of inequality in Australia evolves will depend on the opportunities that citizens have to improve their living standards today. For by far the largest number of us, sustained economic growth and reliable access to employment — complemented by skills and education improvements as specified in our 2017 report, Shifting the Dial — will offer these opportunities and the ability to embrace them. 

But for a significant albeit much smaller group, the challenges are much more complex. Growth and complementary improvements in skills and education policies will not be enough. In some previous research, we found that needs in housing or health policies could better be fashioned to address more directly than today quite specific needs — what might be termed ‘hand-made’ policy — as we look out towards a fourth decade of uninterrupted economic growth.