Is Inequality Increasing? Presentation for Parliamentary Library Vital Issues Seminar, 10 October 2012 Peter Whiteford, Crawford School of Public Policy

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 to and in some cases The ABS has changed and improved income measures over time; for consistency we use the “unimproved” income measure, showing lower inequality after , 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 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 and the 90/10 ratio was around 4 to 1; in the USA, the Gini was and the 90/10 ratio was about 6 to 1; in Denmark the Gini was 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

Change in inequality, OECD countries, 1995 to

Change in Sen welfare index, OECD countries, 1995 to 2008 Change in real mean household income adjusted for inequality

Change in real GDP, Australia and selected OECD countries, 2008 to 2011 Q4 2007=100

Median Australian households have fared extremely well 1998=1 Australia USA

Trends in income inequality in Australia, to Gini coefficient

Trends in income inequality (Gini coefficient) among households with a head aged 65 years and over, Australia, to

Patterns of income growth by decile and period, Australia, to Average annual percentage change in real equivalent income unit income, working age

Trends in income inequality in different income components among working age income units, Australia, 1982 to Concentration coefficient

Earnings have grown with rising employment Annual average real change in earnings by deciles of income unit income WomenMen 14

Trends in income inequality in different income measures among working age income units, Australia, 1982 to

Reduction in inequality among income units of working age, Australia, 1982 to Point difference in Gini coefficient

Change in real value of transfers (2008 $pw) received by deciles of working age income units 17

Change in working age income support recipients, to % of households by age group

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 90 th percentile earned 2.0 times as much as a worker at the 10 th percentile- this disparity increased to 2.3 in 1996, 2.5 in 2004, and 2.8 in In 1982 a working-age family at the 90 th percentile earned 112 times as much as a family at the 10 th percentile – this disparity reduced to 56 times as much in 1996 and 49 times as much in 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 Taxes reduced the disparity to 8.0 to 1 in 1982, 7.5 to 1 in 1996 and 9.6 to 1 in

Poverty in a time of prosperity Payments for single person as % of median equivalent income

Average tax rates (%) by deciles of household income, 1982, and

Income measures and concepts are important Inequality is lower the longer the time period over which it is measured: –Between 2001 and 2009 the Gini coefficient ranged between in 2000, in 2003, in 2007 and 2008 and in 2009; inequality over a two-year period varied between and 0.295; inequality over a four year period varied between and 0.282; inequality over the 9 years was Before 2009 longer term measures showed increasing inequality. Broader measures of resources also suggest lower 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 was 3.94 to 1, but for “final income” it was 2.64 to 1 – but up from 2.48 to 1 in –Adding imputed income from housing reduces the Gini coefficient in from to – but still shows increasing inequality (0.277 in and in ). Inequality is mainly reduced by raising the bottom not reducing the top: –Direct taxes and cash transfers increase the incomes of the 10 th percentile by 231% and lower the income of the 90 th percentile by 19%; –The net effect of Indirect benefits and taxes is to raise the 10 th percentile by a further 50% and raise the 90 th 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 to , 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 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 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