Distribution of Income and Wealth in Australia
The distribution of income and wealth is a very important economic objective that the government focuses on significantly. Because Australia is a mixed market economy that operates without government intervention, it will produce unfair outcomes because some individuals and groups within society will have less opportunity than others. This is why it is important to sustain an acceptably equal society in where there is plenty of opportunity. However, in recent years a new approach has been undertaken by the government in where they are more concerned with sustained economic growth, low inflation and lower unemployment. It is generally believed that the better approach is to focus on sustained economic growth, which will allow all income earners to benefit (both high and low). Inequality of income can be measured by using the Lorenz curve and the Gini coefficient. Australia has been experiencing an increasing Gini coefficient (meaning increased income inequality) over the 4-5 years leading to 2008. In 2007-08 and 2009 it recorded a Gini coefficient of 0.331. There are many causes that lead to an unequal distribution of income and wealth. These can depend on a person’s age, gender, occupation, cultural background etc. An unequal distribution of income and wealth can have many effects on the economy – these effects can be split into costs and benefits.
The inequality that arises due to a person’s age is a major economic issue that has caused the government to take action in reducing the inequality that arises. Australia is a country with plenty of opportunity and this is apparent when taking into account the level of education and training available. The inequality of income between individuals is particularly noticeable in the youth age group (15-19, 20-24) and the older individuals group (65+). The distribution of wealth follows the same unequal trend as the distribution of income in where it peaks at around the middle-aged group (35-59 years of age).
There are many notable trends that arise due to the inequality of income as a result of individuals’ age. Over the years, the 15-19 age group have been the lowest income earners, recording a mean weekly income of $278 in August 2008. (ABS Cat. 6310.0 Aug 2008). This trend occurs because at this age, individuals have less education, skills and qualifications and hold lower paying employment or part-time jobs. Most of these individuals are still spending most of their time studying at some form of educational facility (i.e. university, TAFE) which restricts their ability to have high paying employment or employment itself. The 20-24 age bracket earns a weekly mean income of $657, which is higher than the 15-19 age group but is still significantly lower than the middle-age income earners’ mean. A trend can also be seen as a person gets older. As people move into the 65+ age group, their income declines from their peak (which is during their middle ages). This occurs because individuals are less able to work in full time employment at older ages and are inclined to retire. In August 2008, the 65+ age group recorded a mean weekly income of $830. This statistic is not nearly as low as the 15-19 age group and this is because of the various forms of retirement income that they receive (i.e. pensions). The distribution of income according to an individual’s age is illustrated in the table below.
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From the table, there is a notable trend of the distribution of income according to age. The general trend is that income levels are very low during the earlier years of an individual’s working life. As people get older and move into their middle ages, their income levels peak (because of their higher education and skills). And finally, when individuals move into the older age groups (65+), their incomes decline again, although not emphatically.
There are increasing inequality trends in the distribution of income of all income earners. In
2005-06, the highest income quintile earned 39.2% of total income in Australia. In 2007-08, this figure rose to 40.5% - showing an increase in income inequality. This result correlates with a decreasing share of income earned in the lower income quintile. The level of disposable income in households is illustrated below.
By considering the differences in mean income ($811) and median income ($692) in Australian households during 2007-08, the unequal distribution of income can be seen. It can be dissected that there is a relatively small amount of people in the high earning income bracket and a relatively large amount of people in the lower earning income bracket.
There are many causes that can lead to an unequal distribution of income and some of these include: age, gender and geography.
Inequality of income can arise because of the age disparities between individuals. Younger individuals (15-24) are the lowest income earners of all the age groups and this has been documented over the years. This is because of the lack of education, skills, qualifications and experience that young people have. They have not had a significant amount of opportunity to attain the requirements necessary for higher paying employment. Most of the youth are still studying in some form of educational facility (i.e. university, TAFE). As the age increases, so does the level of income – peaking in the middle ages. It then declines again at the older age group (65+). This happens because individuals are less able to work and are moving into retirement which reduces their income earning potential. During this period, they rely on superannuation, pensions and other forms of retirement income.
Gender can also help cause the presence of inequality of income. Generally, males earn more on average than females do. Statistics show that men earn more than women on average even when they have the same job and working hours. According to a 2008 report by the National Centre for Social and Economic Modelling, in recent years the gap in earnings between males and females in younger workers (born after 1976) has widened. This trend is shown in the table below.
From the table, it can be seen that the disparity of income between males and females has not altered much in the past two decades. The average income earned by females still tends to be approximately two-thirds of the income earned by males.
There are many effects that arise due to the inequality of income. These can be split up into economic and social costs and benefits. Benefits include: encouragement of higher education attainment and a more mobile labour force. Costs include: reduction of economic growth and increased government expenditure on welfare.
Inequality of income can lead to individuals attaining a higher education. This is because people will be encouraged to work in higher paying employment because of the increased income rewards that provide them the incentive to obtain higher education and skills.
The labour force can become more mobile as a result of inequality of income. Higher incomes will behave as an incentive to entice labour to move to where is necessary. If the labour force is more mobile, this will make resource allocation more efficient – leading to increased economic growth. Australia recorded an economic growth of 1.0% in 2008-09 – impressive considering the growth rates of other OECD counterparts during the time of the global financial crisis.
However, there are some costs that arise due to the inequality of income. While it can help increase economic growth, it can also constrain it. This is because lower income earners will reduce their consumption levels (as they have a higher marginal propensity to consume) and increase their level of savings – leading to decreased aggregate demand. In an economy with a high level of inequality, this can lead to a restriction on economic growth. It is less likely to occur in a relatively equal country (like Australia).
Income inequality causes the cost of welfare support to increase. This is because the government will have to provide support payments for lower income earners in order for their survival. This will ultimately, reduce the revenue that the government possesses which leads to lower government expenditure on other aspects such as infrastructure, education and public services – leading to reduced economic growth.
The Australian government has undertaken various policies and strategies in order to reduce the income inequality that is present so that the economic and social costs are alleviated. They have also specifically reduced income inequality that arises due to age by targeting particular age groups with policies and strategies.
Superannuation is a compulsory program that every Australian worker is involved in.