Distribution of income and wealth

A majority challenge of government policy is to ensure fairness in the spread of wealth and
economic opportunity throughout an economy. Governments must ensure that one part of
society does not shoulder in unfair share of the burden of structural change, and that the
benefits of Australias economic successes do not just flow to those who are already
financially well off, which can increase the degree of inequality in income and wealth and
create a more divided society

Although Australia considers itself a country of fair go, economic evidence suggests
however that inequality in Australia is around the average level for developed nations.
Nevertheless, by avoiding the GFC Australia has avoided increased inequality that many
advanced economies have experienced

Many of the factors that contribute to an increase in inequality are side effect of the polices
that aim to create a more efficient, internationally competitive economy. While inequality is
a feature of all economies, the degree of inequality

Measurement-Lorenz curve and Gini coefficient

Personal income is the amount of funds, or other benefits measured in money
terms, that flow to individuals or households from the sale of factors of
production over a period of time. Forms of income include wages from enterprise
Income inequality refers to the degree to which income is evenly distributed
among people in the economy. The degree of evenness could range from a high
level of equality, where people receive a similar share of income, to a high level
of equality, where there is large gap between high and low income earners.
Income inequality can be measured by the share of total income received by
different groups

Concepts useful when interpreting statistics in distribution of income and wealth:

Mean income average level of income -> divide the total income of a group by the
number of income recipients in that group
Median income divides the income recipients into two halves -> one half halving
the incomes above the median and the other half halving incomes below the median

There are two methods of measuring income inequality are:

- The Lorenz curve
The Lorenz curve is constructed by plotting the cumulative
percentage of total income received (vertical axis) against
the cumulative percentage of income recipient (horizontal
axis). If income were distributed evenly across the whole
population, the Lorenz curve would be the diagonal line
through the origin of the graph - the line of equality. The
 further the Lorenz curve is away from this line, the greater
the degree of income inequality in society
- The Gini coefficient
The Gini coefficient is a single statistic that summarises the
distribution of income across the population. The Gini
coefficient ranges between zero when all income are
equal a, and one when a single household receives all the
income Therefore, the smaller the Gini coefficient, the
more even the distribution of income. In 2011 Australia
was ranked 27th in the OECD for its Gini coefficient of 0.34,
with a distribution of income more unequal in Australia
than in the most OECD economies (averaging 0.31)
2015 -16 ranked 22nd with Gini of 0.33

The Gini coefficient =
+

- Measuring the distribution of wealth in Australia

The top 20% of wealthy people own around 62% of total
wealth in Australia and the bottom 20% own almost
nothing
It takes longer for the degree of wealth to change
compared with income inequality
o Between 1915 and 1967, wealth inequality in
Australia improved dramatically as a result of
urbanisation (people moving to cities)
o After worsening between 1967 and 1986, wealth
inequality has remained stable, with the Gini
coefficient remaining near 0.64 between 1986 and
1998 and declining slightly to 0.61 by 2002 and
0.63 in 2016. While inequality has grown across
many types of wealth assets, this has even counter-
balanced by the growth of superannuation wealth,
which is more equally distributed because
superannuation is compulsory for employees
Sources of income as a percentage of household
Wages from the sale of labour (57.2%): this is the main source of income for
consumers. It comes in the form of wage or salary payments for labour when
consumers participate in the labour market. It also includes non-wage income
such as fringe benefits, employer contributions to superannuation, workers
compensation payments (wage)
 Rent from land (11.2%): many consumers own land that becomes a source of
income when it is rented (rent)
Earnings from capital (17 %): returns from the ownership of capital are a
significant source of consumer income. People with greater wealth tend to enjoy
a much higher income because wealth creates ongoing income through returns
from owning the factors of production (interest)
Profit from sale of entrepreneurial skills (17%*): if the business makes a profit
this income is considered a return for their use of entrepreneurial skill (revenue)
Transfer payments (9.6%): this refers to social securities and social welfare. Over
a third of the total income tax that is collected is used to pay unemployment and
sickness benefits, age and disability pensions, family allowances and similar social
securitys payments (transfer payment)
Taxation, transfer payments and other assistance
Changes in government taxation, transfer payments and other assistance
have the most direct impact on inequality in Australia. Overall, government
intervention tends to reduce income inequality by taxing the wealthiest
groups more heavily and redistributing income to lower socio-economic
groups
As income rises, so too does the level of taxation. This occurs because
Australia has a progressive income tax system, with higher marginal tax rates
for higher income levels
Compulsory superannuation has significant improved the distribution of
wealth in Australia, since its introduction in 1992. Under the current rules,
employers must contribute a minimum of 9 percent of an employees wages
to a superannuation fund which they cannot access until their retirement
Sources of wealth
Household net worth is a measure of private sector wealth in Australia. Net
worth is the extent to which the value of household assets such as houses
and savings exceeds the value of their liabilities such as loans
In 2009-10, the average household had assets worth $839,400, liabilities
worth 199,800 and a resulting average net worth of $719,600.
The two largest components of household assets are property and
superannuation, which accounts for almost household assets in Australia. The
relative importance of both these types of assets has increased significantly
in recent decades, while savings and ownership of business assets have
decreased in relative importance
The most significant household liabilities are loans taken out to purchase
property, which accounts for 87.5 % of household liabilities in Australia
 Dimensions and trends, according to gender, age, occupation, ethical
background and family structure
During the long period of economic growth during 1990s and 2000s, Australia
experienced an increase in overall levels of inequality. Some groups in society
are more affected b inequality than others, depending on their age
qualifications, gender, ethnic background, family type and where they live in
Australia (there is greater inequality in wealth than income)
Weekly income ranging from around $150 per week to $1400 for the majority
of people. Over half of the population earns less than the mean income of
$848 per week, indicating that income distribution is asymmetric (unequal: a
relatively small number of households have relatively high incomes and a
large number of households have relatively low incomes)
Dimensions and trends according to:
Gender
- In 20011-12, the average weekly earnings of women were only
two-thirds of those of make earnings. This difference in the
earning of males and females can be explain by the human capital
factors (due to past attitudes concerning the role of women in
society, female and fewer opportunities to acquire education,
skills and qualifications. However, even after taking into account
difference in jobs and working hours, the average weekly earnings
of female are still lower than those of males, suggesting that
there may also be discrimination in the labour market. In fact, the
gap in earnings between males and females in Generation Y
workers has increased in recent years
- This presence of discrimination is confirmed by an observation of
the average earnings of males and females working full time in
the same occupation group. Even after we have taken
occupational categories into account, on average, female
employees earn less than their male counterparts, regales of
whether they have the same qualifications and experience as men

Age
- Income varies over the course of a persons life, although it tends
to remain highest between the ages of 25 and 64 (the main years
of a persons working life). 45-49 age bracket earns the highest
mean income per week ($1243) while those aged 15-19 earn the
lowest ($4282), followed by those aged between 20 & 24 ($709).
 Income levels are low in the earlier years of working life (since
people have less education and experience and hold lower paying
or part time and casual jobs. Similarly, income levels decline as
people get older and need to rely on aged pensions or other
forms of retirement income
- The distribution of wealth follows a similar pattern according to a
persons age (rising for most of their lifetime, and falling away as
people get older and move into retirement.
Ethnic background
- Approximately one out of every four Australian workers was born
overseas, with 59% of them coming from countries that are not
mainly English speaking nations. In general terms, those born
overseas tend to receive higher weekly income levels than those
born in Australia. However, income distribution Is strongly
influenced by the length of time that migrants have been in
Australia and the countries form which they have migrated
- Migrants from mainly English speaking countries tend to have
higher levels of income than those born in Australia. Income
distribution is also more unequal, with a greater percentage of
migrants earning very high incomes and no incomes compared
with those born in Australia
- Migrants from non-English speaking countries is very different,
recent migrants from non-English speaking countries have lower
income levels than Australian born people. This may reflect the
fact the even if non-English speaking background migrants have
the equivalent skills and experience of their Australian born
counterparts
 Economic and social costs and benefits of inequality
Some economists argue that inequality is a natural consequence of the free market functioning effectively
since each individual receives a share of income according to their marginal productivity. In addition, they
content that inequality has the advantage of creating a strengthening individuals; incentives and
increasing their share of output. In other words, people will be encouraged to work harder to gain a large
share in the distribution of income

On the other hand, some economist emphasise the social costs associated with inequality. They argue
that the system of free market capitalism divides society into different classes (e.g. working class, middle
class and upper class) and that the system tends to entrench high levels of inequality and poverty

Economic benefits of inequality

Inequality encourages the labour forces to increase education and skills levels
Inequality encourages the labour forces to work harder
Inequality makes the labour forces more mobile (allocation of resources)
Inequality encourages entrepreneurs to accept risks more readily
Inequality creates the potential for higher savings and capital formation
Inequality creates technological progress
Economic costs of inequality
Inequality reduces overall utility
Inequality can reduce economic growth
Inequality creates conspicuous consumption
Inequality increases the cost of welfare support
Social benefits of inequality
Formation of a structured society (Most efficient and productive allocation of
resources)
Social costs of inequality
Social class divisions
Poverty

Economic Benefits Social Costs

Increased risk-taking by entrepreneurs: Entrepreneurs will be encouraged to more Higher levels of poverty: Mainly seen at the lower end of income scale.
readily accept risks for the prospect of considerable income rewards Poverty is often particularly prevalent in specific regions and amongst

The workforce will work longer and more productively: Longer working hours will specific groups in the community. This is due mainly to the Inequality of

result in greater income. However workers will only work longer if they feel the extra opportunity. Poverty will result in, Lower health standards, Crime, Lower

income is worthwhile. Tax can reduce incentive, especially in a progressive tax life expectation and low level of self esteem

system, where higher incomes are taxed at a higher rate. An incentive of higher pay Greater strain on government: As the provider of welfare, health and
for increased output will encourage an increase in productivity other community services, inequality will result in higher demand and

The workforce becoming more educated and skilled: Workers will seek training and costs for such services, while reducing taxation revenue that is required

further education to increase their employability for higher paid positions. to pay for it.

Increased incentive for labour force mobility: Higher income incentives will Social divisions: The emergence of splits in society based on income and

encourage labour to gain the necessary skills and make the effort to move to efficient class group. This can lead to tension fuelled by jealousy. The Primary and

industries needing employees. A more mobile labour force will lead to a more secondary markets labour markets have divided among class lines,

efficient allocation of resources and a higher rate of economic growth and prevent making it difficult for individuals in the secondary labour market to move

structural unemployment into the primary labour market.

Higher savings and capital formation: Higher income earners tend to save a higher Vicious cycle: While affluent groups engage in conspicuous consumption
proportion of their income and have a higher MPS than low income earners. This can (consumption for the purpose of displaying wealth) those on lower
provide funds for increased investment and capital formation. Additionally, saving is incomes can become trapped in a cycle of poverty, reducing their self-
a crucial method of funding investment that in turn ensures future economic growth esteem and causing social alienation
and a reduction in our reliance on foreign savings. This helps to reduce the CAD.