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Chapter 11: Distribution of Income and Wealth

Chapter 11
Distribution of Income and Wealth
THE MEASUREMENT OF THE DISTRIBUTION OF INCOME
Economists measure the distribution of income and wealth by constructing a Lorenz Curve which
graphs data on income shares for equal groupings of the population or income units (such as 20%
quintiles) as shown in Figure 11.1. The Lorenz Curve has four important properties:
1. It begins at zero, with zero families earning no income or wealth (refer to the bottom left hand
corner of Figure 11.1).
2. It ends where 100% of families earn 100% of all income or wealth (refer to the top right hand
corner of Figure 11.1);
3. The line of perfect equality is a diagonal line showing that the bottom 20% of families account for
20% of all income; the next 20% of families receive 20% of all income; 60% of all families receive
60% of total income (i.e. point C in Figure 11.1) and so on.
4. In reality there are significant differences in the distribution of income and wealth in economies, so
the Lorenz Curve will lie below the line of perfect equality (see Figure 11.1).
The size of the area between the line of perfect equality and the Lorenz Curve (Area A) is used as a
measure of inequality. Any change in the distribution of income or wealth causing the Lorenz Curve
to shift inwards (to the left) would indicate reduced inequality. An outward shift (to the right) of the
existing Lorenz Curve would represent increased inequality. The Gini co-efficient is a mathematical
expression of the degree of income or wealth inequality. It can be calculated by comparing Area A (see
Figure 11.1) with the total area of the triangle bounded by the line of perfect equality and the income
and wealth, and income units axes (Area A + Area B). The Gini co-efficient is calculated as follows:

Area A
Gini co-efficient
=
Area A + Area B
Figure 11.1: The Lorenz Curve

Cumulative % of income or wealth

100
80

Line of Perfect Equality
C

60

Area A

40

Area B

20
Lorenz Curve
0

20

40

60

80

100

Cumulative % of families or income units (quintiles)

© Tim Riley Publications Pty Ltd

Year 12 Economics 2014

241

e.5% Rent. profits (17. termed as ‘compensation of employees’. if the GC is equal to 1 there is perfect inequality) Therefore the Gini co-efficient has a value ranging between zero (perfect equality) and one (perfect inequality). accounted for 56% of total gross income in 2011-12. the whole right side triangle would be equal to Area A. whereas a decreasing Gini co-efficient (1 to 0) denotes increasing equality or decreasing inequality. Catalogue 5206.e. rental and interest income is received by self funded retirees.0. interest on capital.2%).5% of total gross income in 2011-12. (+6.e.0% Source: ABS (2013). profits (+5. property income (11. land. if the GC is equal to 0 there is perfect equality) If there was perfect inequality.e.2: Sources of Household Income in Australia 2011-12 Wages and Salaries 56. A 1 Gini co-efficient = A + B = 1 + 0 = 1 (i. job search allowances and other forms of welfare.7%). retirees and wealth holders) and was 11. Figure 11.2 shows that the main sources of household income in Australia in 2011-12 were wages and salaries (56%).8% of total gross income in 2011-12.1 lists the dollar values of all the main sources of income from the household income account compiled by the ABS for 2011-12. as it can vary over time according to a person’s contribution to production and changes in personal circumstances.242 Chapter 11: Distribution of Income and Wealth © Tim Riley Publications Pty Ltd If there was perfect equality. labour. or as government transfer payments such as pensions. A majority of dividend.7%) and property income (+10.8%) and social benefits (9. and profit from business enterprises. The main forms of earned personal income include wages and salaries from the contribution of labour to production. March.7% Other 5.0% Profits 17.e. Figure 11. Gross operating surplus and mixed income is the income from the profits generated by private incorporated and unincorporated trading enterprises and was 17. capital and enterprise). Area A would not exist and the Gini co-efficient (GC) would be zero i. Property income is the rent.6% between 2010-11 and 2011-12. Income is a flow concept in economics.e. Table 11. The main trends in sources of income in 2011-12 were strong growth in wages and salaries. Interest and Dividends 11. Australian National Accounts.1%) due to economic recovery in Australia after the Global Financial Crisis in 2008-09.g. Wages and salaries and supplements (i. Year 12 Economics 2014 © Tim Riley Publications Pty Ltd . The main forms of unearned personal income include rent from the use of land. in return for their factors of production (i. with total gross income increasing by 6. An increasing Gini co-efficient (0 to 1) indicates increasing inequality or decreasing equality. THE SOURCES OF INCOME Personal income refers to the money and the value of benefits in kind received by individuals during a period of time. workers’ compensation and superannuation). and the value of the Gini co-efficient would be equal to one i. 0 Gini co-efficient = 0 + B = 0 (i. not reliant on government social benefits for income.8% Social Benefits 9.5%). interest and dividends received by households (e.

Australian National Accounts. allowances and tax benefits or tax expenditures. utilities. Around 35% of the revenue raised by the progressive taxation system is spent by the government on transfer payments such as pensions.2 Gross operating surplus and mixed income (profits) 219.0 6.0 Non Life Insurance Claims 30.3 20.000 19% MTR $180.7 7. housing. youth. the sick. Social benefits accounted for 9. ranging from 19% to 45%: $0–$18. childcare and community services. people with disabilities. education. These benefits may be in the form of direct government provision such as the federal Medicare system for health. Aborigines and Torres Strait Islanders and other welfare beneficiaries such as carers.572 2.8 10. education.3% of the total) include government transfers to households not elsewhere classified.00+ 45% MTR $37.891 17. From July 1st 2012 all taxpayers were given a tax free threshold of $18. Non life insurance claims (2.1: The Sources of Household Income in Australia 2011-12 Annual $m % of Total Gross Income %r from 2010-11 Compensation of employees (wages and salaries) 705.565 9. March.0.388 100.001–$80. increases as gross income increases.201–$37. This refers to public spending on health. © Tim Riley Publications Pty Ltd Year 12 Economics 2014 243 . housing.3% of the total) include non capital transfers from government to charitable institutions. Transfer Payments and Other Assistance The Australian government’s welfare or social policy is based on the redistribution of income from high income earners to low income earners through the systems of progressive taxation and means tested welfare payments.000 32.5 5.0 6. rates.200.5% MTR 2. family benefits).665 56.7 3. Social benefits receivable grew by 7% in 2011-12 as the unemployment rose slightly from 4.567 2. Catalogue 5206.© Tim Riley Publications Pty Ltd Chapter 11: Distribution of Income and Wealth Table 11. Other current transfers (0. where the proportion of tax and the rate at which tax is paid on personal income. The system of progressive taxation. which provides a safety net for low income earners and families with children.9% to 5. These payments are income and assets tested to ensure that only the most needy are in receipt of government social welfare payments.6 Other Current Transfers Total Gross Income Source: ABS (2013). Taxation.200 Nil MTR $80.4% of the total) are net payments to households from non life insurance policies. paid mainly to households unable to earn sufficient market income to sustain a minimum standard of living.225 11. transport and community services.3 -0.1 Social Benefits Receivable (social welfare) 122. The three main elements of the government’s tax-transfer system are the following: 1.261.g. Thereafter the four income tax thresholds attract higher marginal tax rates (MTRs).7 Property Income (rent. low income families with children.000 37% MTR $18. The main recipients of transfer payments are the aged.903 0. transport.7% of total gross income in 2011-12 and include pensions and other means tested government allowances (e.4 -4.001–$180.2%. the unemployed.3 Current Transfers to Non Profit Institutions 29. interest and dividends) 149. Current transfers to non profit institutions (2. Other assistance by governments to disadvantaged and low income individuals and families includes expenditure on the social wage. or state government provision through subsidies and rebates for public health. veterans and their dependants.8 1. 3.

In 2011-12 the value of total household assets was estimated by the ABS to be $8. Year 12 Economics 2014 © Tim Riley Publications Pty Ltd .6%). Most of the wealth owned in Australia is private wealth consisting of domestic and foreign assets. Net wealth in 2011-12 of $7. debentures and bonds (6.323b 15.0% Value of owner occupied housing and other property Value of contents of dwellings Source: ABS (2013). and motor vehicles (2. High income earners usually have high saving ratios. owner occupied houses. Wealth is a stock concept in economics.244 Chapter 11: Distribution of Income and Wealth © Tim Riley Publications Pty Ltd THE SOURCES OF WEALTH Personal wealth is the net value or stock of real and financial assets owned by individuals at a particular point in time. trusts. and had increased by $1.018 58.237b or 20.582b).7% from $7.5% $626b 7. debentures and bonds.3% Value of vehicles $212b 2. gave households an aggregate net worth or net wealth of $7. high incomes can generate increasing levels of wealth. Table 11.5% Total Household Assets $8. Catalogue 6554. trusts.4% of total household assets) and the value of household contents (7. in addition to earned sources of income such as wages and salaries.4%). and in most cases.050b in 2009-10. while people with substantial wealth usually have high incomes.3% $551b 6. Persons with a substantial stock of wealth therefore have the ability to derive unearned income such as rent.4% $482b 5.4% since 2009-10.582b. which allows them to accumulate wealth such as property and financial assets.281b in 2011-12.e.0. increasing by 21.6% $1. savings with financial institutions (4. interest and dividends. Subtracting total household liabilities (-$1. bank deposits. financial liabilities such as mortgages) owed by an individual from the gross value of total non financial and financial assets owned by that individual. trusts. rent. shares.5%). and investment properties) and consumer durables (e. cars and household contents). Other major forms of wealth in 2011-12 included superannuation (15. houses and home units) and other property (such as investment properties and businesses) which accounted for 58. interest.e. The rest of household wealth consisted of the value of own incorporated and unincorporated businesses (5. Household Wealth and Wealth Distribution 2011-12. home units. People with little wealth usually have low incomes. This is because wealth generates income.301b) from total household assets ($8. personal and other loans) were estimated by the ABS at $1. The net value of assets or net worth is calculated by subtracting any debts (i.3%). debentures and bonds Value of own incorporated and unincorporated businesses Value of superannuation 2011-12 % of Total $370b 4. page 22.4% $5.5% of total household assets in 2011-12 as shown in Table 11.2.301b in 2011-12.281b represented about five times Australia’s annual GDP in 2011-12.3% of total household assets). shares.582b 100. which in turn generates unearned forms of income such as profit. The main component of private sector wealth (according to the latest ABS Survey in 2011-12) in Australia is owner occupied dwellings (i. since it is the amount of a person’s net assets at any one point in time: Net Value of Assets or Net Worth = Total Non Financial and Financial Assets . profits and dividends. Real or non financial assets include property (e.g. Financial assets include cash.Total Financial Liabilities There is a strong correlation between income and wealth.g.2: Main Components of Household Assets in Australia 2011-12 (% of total) Type of Household Asset Value of accounts held with financial institutions Value of shares. Total household liabilities (consisting mainly of mortgage.

Catalogue 6523. which was a reduction in inequality of 4.336 in 2007-08 to 0. the third quintile’s share fell by 0. For example.5% of total equivalised disposable household income.320 in 2011-12.2% 41. In Table 11.320 Source: ABS (2013).3% 7.8% 7. The Gini co-efficient of 0.329 in 2009-10.8% because of tax cuts and increased welfare payments to low income households.3 indicates changes in the shares of income for the five quintile groups between 2005-06 and 2011-12.814) All Income Units 100.1%.057) Highest 39.0% 100. An equivalence scale is applied to make the needs of households equivalent.5% ($346) Second 12. However the Gini co-efficient fell from 0. This difference reflects the typically asymmetric distribution of Australian incomes which is illustrated in Figure 11.0% (av. the lowest quintile or 20% of households received 7.0% 40.3 income shares are shown for the five quintiles of the Australian population between 2005-06 and 2011-12.3). July. and to 0.0% 22.314 0. and the highest quintile’s share rose by 0. third and fourth income quintiles.0% Gini co-efficient 0. fourth and highest quintiles.1%. and the ABS calculates the percentage of total equivalised disposable household income received by each quintile.9% 17.2% 39.0% 100.7% 12.314 in 2005-06 rose to 0. The Australian population is divided into quintiles or equal 20% groupings of the population.4% 12. third. Household Income and Income Distribution 2011-12*.0% 23.6% ($581) Third 17. Table 11. starting from the lowest quintile and proceeding to the second. © Tim Riley Publications Pty Ltd Year 12 Economics 2014 245 .329 100.9% of total equivalised disposable household income in 2011-12.3% 12.3: • A relatively small number of people have relatively high household incomes. Income Quintile Lowest Income pw 11-12 7.336 0.3%. Equivalised disposable household income adjusts disposable income (gross income less taxes) for the different needs of households arising from the different numbers of people and proportions of adults and children in households.3: Percentage Income Share for Income Quintiles. The median income (i. They indicate that there is a high degree of income inequality in Australia as in most market economies in the OECD. Disp.4% 7.4% 16. The middle three quintiles (60% of the population) received 52.3% ($793) Fourth 23.e.0. whereas the highest quintile or 20% received 39.© Tim Riley Publications Pty Ltd Chapter 11: Distribution of Income and Wealth TRENDS IN THE DISTRIBUTION OF INCOME AND WEALTH The distribution of income is measured by the ABS from data in the Survey of Income and Housing. the fourth quintile’s share stayed the same at 23%. the midpoint where all people are ranked in ascending order of income) in 2011-12 for all households was lower at $790 per week. relative to those households in the lowest. $918) 0.0% ($1.6% 23. Australia 2005 to 2012 2005-06 2007-08 2009-10 2011-12 Equiv.5% ($1. the second quintile’s share fell by 0.336 in 2007-08.0% 17. The lowest quintile’s income share fell by 0.3%.5% of total equivalised disposable household income in 2011-12. indicating an increase in income inequality of 7% between 2005-06 and 2007-08 due to strong growth in wages and salaries and unearned sources of income to households in the highest income quintile. and • A large number of people have relatively lower household incomes. The mean or average equivalised disposable household income in 2011-12 for all households was $918 per week (refer to Figure 11. second. NB: figures are rounded and do not total * The Household Income and Income Distribution 2011-12 is the latest ABS survey The ABS survey of the distribution of equivalised disposable household income in Table 11.

0. There was little significant change in average equivalised disposable household income for high income households. Catalogue 6523. According to the ABS real average equivalised disposable household income did not show any significant change between 2009-10 ($894) and 2011-12 ($918). July. 2011-12.5: Lorenz Curves for Australia 2011-12 Source: ABS (2013).320 while the Gini co-efficient for persons in one parent households was 0. Year 12 Economics 2014 Normally the degree of inequality is greater for the population as a whole than for a subgroup within the population. and by 4% for middle income households as shown in Figure 11.245. because sub populations are usually more homogeneous than full populations.2m) in 2011-12. Household Income and Income Distribution 2011-12. Catalogue 6523.Chapter 11: Distribution of Income and Wealth © Tim Riley Publications Pty Ltd Figure 11. was $918 per week.5 which shows two Lorenz curves from the ABS 2011-12 Survey of Income and Housing. Average equivalised disposable household income increased from 2009-10 to 2011-12 by 5% for low income households. The Lorenz curve for the whole population of the survey is further from the diagonal line of perfect equality than the curve for persons living in one parent households. July. Figure 11.4. Figure 11.3: Distribution of Equivalised Disposable Household Income in 2011-12 Median $790 Mean $918 % of Households 246 Equivalised Disposable Household Income ($ per week) Source: ABS (2013).4: Changes in Mean Real Equivalised Disposable Household Income Source: ABS (2013). July. © Tim Riley Publications Pty Ltd . Real average equivalised disposable household income for all persons living in private dwellings (22. Correspondingly the Gini co-efficient for all persons was 0.0. Household Income and Income Distribution. Catalogue 6523. This is illustrated in Figure 11.0. Household Income and Income Distribution 2011-12.

100.0% Highest quintile 60. cash.0% 24.0% 100. Table 11. resulting in average household wealth of $728.2% 9. superannuation and value of businesses). accounting for the top quintile’s high share of net worth but lower share of income.5% 39. Differences reflect the asymmetric distribution of wealth between households: • A relatively small proportion of households had relatively high net worth in 2011-12. with median household wealth substantially lower at $434.6. © Tim Riley Publications Pty Ltd NB: figures are rounded & do not total Year 12 Economics 2014 247 .5%. In contrast the 20% of households comprising the highest quintile accounted for 60. Therefore many households with low wealth have relatively high income.9% of total household net worth.100. August.3% 12. gross household income per week and equivalised disposable income per week for 2011-12.g.0% 100. Differences in the distribution of wealth and income partly reflect wealth being accumulated during a person’s working life and being utilised during retirement.8% 46.5% 100.6% Third quintile 12.5% Second quintile 5. they accounted for 4.3% 7.9% 4.g.000.3% 23. Catalogue 6554. Catalogue 6554. Conversely older households tend to accumulate relatively high net worth over their lifetimes but have relatively low income in their retirement.7% 17. bank deposits.0. Household Wealth and Wealth Distribution 2011-12.g. The distribution of wealth is more unequal in Australia than the distribution of income.© Tim Riley Publications Pty Ltd Chapter 11: Distribution of Income and Wealth Figure 11.6: Distribution of Household Net Worth 2011-12 Mean $728.4: Shares of Household Net Worth and Income 2011-12 Quintile Household Net Worth Gross Household Income Per Week Equivalised Disposable Household Income Per Week Lowest quintile 0. Household Wealth and Wealth Distribution.0.000 Net worth $000s Source: ABS (2013). Table 11. and the mean value of household liabilities (e.100 % of households Median $434. mortgage loans and other debts) at $130.0% All households Source: ABS (2013). The ABS survey of Household Wealth and Wealth Distribution 2011-12 calculated the mean value of household assets at $858.8% of total household net worth. such as younger households.4 shows quintile shares of household net worth. homes. The ABS measures wealth as the net worth of households by subtracting the value of household liabilities (e. and • A large number of households had relatively low net worth in 2011-12. but a lower share of gross household income of 46.3% Fourth quintile 21. While the 20% of households comprising the lowest quintile accounted for only 0.0% 15. The distribution of Australian household wealth is shown in Figure 11.200. loans) from household assets (e.3% of total gross income.

273 for adult males and $818 for adult females (ABS survey of earnings in 2011). Year 12 Economics 2014 © Tim Riley Publications Pty Ltd . Table 11. many being reliant on government welfare for income. In 2013.2 in your answer. with migrants residing in Australia for longer periods of time earning higher incomes than migrants residing for less time.1. Refer to Figure 11. age. Discuss the relationship between income and wealth. 5. Vietnam. persons born overseas earn higher incomes than those born in Australia.1 and the text and explain how the distribution of income is measured using the Lorenz curve and the Gini co-efficient. Discuss changes in this distribution between 2005-06 and 2011-12 by referring to the text and the trends in Figure 11.3. For males and females in the same occupational category. Migrants from countries such as Britain. the USA. compared to AWE of $1. 6.248 Chapter 11: Distribution of Income and Wealth © Tim Riley Publications Pty Ltd REVIEW QUESTIONS MEASUREMENT. occupation. ethnicity and family structure. The distribution of income according to occupation also reveals large variations in incomes between highly skilled and lower skilled occupations. Also the country of origin of migrants is correlated with income. In addition. Discuss the distribution of household net worth or wealth in 2011-12 with reference to the text and the trends in Figure 11. 7. 8. Iraq and Lebanon. In 2011 the average weekly earnings (AWE) for young males was $558.6. male earnings were also considerably higher than average female earnings.4.3. Aborigines and Torres Strait Islanders) earn considerably less income than non indigenous Australians. Indigenous Australians (i. New Zealand and South Africa earn higher incomes than more recent migrants from countries such as China. Discuss the main features of the distribution of equivalised household disposable income in 2011-12 from Figure 11. males on average earn considerably more than females.4. young males and females (15 to 24 years) earn less income than other adult male and female workers. and $575 for young females.249 per week in 2013. 2. Describe trends in the distribution of equivalised disposable household income between 2005-06 and 2011-12 using the data in Table 11. average weekly earnings (AWE) for males were $1. and are amongst the lowest income earners in the Australian community. Managers and professionals earnt an average of $1. In terms of age. Contrast the distributions of wealth and income in Australia using the data in Table 11. Distinguish between income as a flow concept and wealth as a stock concept in economics. DIMENSIONS IN THE DISTRIBUTION OF INCOME The distribution of income in Australia is also analysed in terms of socio-economic characteristics such as gender.2 and Figure 11. clerks and salespersons who earnt an average of between $606 and $1.516 compared to $1.926 per week in 2013 compared to labourers. 3.250 for females. List the main sources of household income and wealth in Australia. SOURCES AND TRENDS IN THE DISTRIBUTION OF INCOME AND WEALTH 1. In terms of gender. However persons from non English speaking backgrounds earn less than those from English speaking backgrounds. Income for males and females is at a maximum in the 35 to 54 year age group. Refer to Table 11. 4. In terms of ethnicity. the period of residence of migrants impacts on the level of income.e.

3 28. ECONOMIC AND SOCIAL BENEFITS AND COSTS OF INEQUALITY Since there is significant inequality in the distribution of income and wealth in Australia it is relevant to discuss the economic and social benefits and costs of income and wealth inequality.8 $1. versus lower economic efficiency. Some level of inequality may also be the result of ongoing structural change or microeconomic reform (such as labour market reform) experienced by Australia in the 1980s.5 shows selected characteristics of four household types by equivalised disposable household income quintiles and their mean weekly incomes in 2011-12. skill acquisition and productivity. which helps to allocate labour more efficiently.9 13. The economy will benefit from higher labour productivity and labour mobility if there is relative wage flexibility. and can lead to increased social tension in the community. it is common to analyse income distribution in terms of households at different stages of the life cycle. single parents with children and elderly couples without dependent children. and argue that some inequality in the distribution of income is an inevitable outcome of the market economic system. couples without children.5 18. 1993) argue that growing inequality leads to social divisiveness and the marginalisation of some groups in society (such as the unemployed. and the formation. households in the highest quintile tended to be couples with or without dependent children.3 2. In comparison. by Equivalised Disposable Household Income Quintiles 2011-12 Household Characteristics Lowest Second Third Fourth Highest Mean Weekly 20% quintile quintile quintile 20% Income ($) Couple with dependent children 14. © Tim Riley Publications Pty Ltd Year 12 Economics 2014 249 . rent. single parents with children.7 $618 Lone person 43.2 11. Other economists (such as R. low income earners. relative to the share of GDP going to labour in the form of wages and salaries.0.9 21.1 $915 Couple without dependent children 24.3% in 2007-08.3 14. but greater income equality and social cohesion. Catalogue 6523. 1990s and 2000s.1 18.6 17. In market economies an unequal distribution of income is usually characterised by a growing share of GDP going to capital in the form of profits.4 31. Gregory. maturation and dissolution of nuclear families.9 14. This trend emerged in Australia in the latter stages of the resources boom when the profit. dividend and interest share of household income rose from 30% in 2006-07 to 31% in 2007-08.5: Selected Characteristics of Households.6 $747 Source: ABS (2013).© Tim Riley Publications Pty Ltd Chapter 11: Distribution of Income and Wealth In terms of family structure.9 21. A perceived economic benefit of income inequality is the ‘incentive effect’ on workers and entrepreneurs. to couples with dependent children. July. Households in the lowest quintile were mainly lone persons (either young or elderly). Many economists believe that the market economy is the most efficient mechanism for resource allocation. Entrepreneurs may also be willing to take more risks if the potential profit rewards are higher. with the principal source of income being wages and salaries. Table 11.8 10. whilst the wages share of household income fell from 56. Table 11.7 20. training. People may therefore be willing to work longer hours and sacrifice less leisure time for additional income. Most of these couple households had two income earners. Households range from young single people just out of school.6 23.030 One parent family 34. Employees will work harder to achieve higher wages and other rewards if these can be attained through higher levels of education. rent. elderly couples and elderly single people. migrants and indigenous people). A typical life cycle covers early adulthood.3% in 2006-07 to 55.3 13. interest and dividends. Therefore the debate about inequality centres on the benefits of increasing economic efficiency (leading to rising income inequality). Household Income and Income Distribution 2011-12.

raised tax thresholds and reformed the welfare system to strengthen the incentives for those on welfare to obtain more paid work. compared to other countries (such as the USA and UK). the ‘growth dividend’) which the government can use to fund targeted welfare assistance to alleviate poverty. including the rate at which income support is withdrawn once work is found. Greater income inequality in Australia may lead to higher spending on social welfare payments by the Australian government in supporting the unemployed. Gregory (1993) revealed evidence of a ‘working poor’ section of the workforce unable to earn high incomes because of low skills and a reliance on annual adjustments to Modern Awards and the National Minimum Wage to increase their income and living standards. the unemployed. In addition. and some taxpayers may resent contributing taxes to support welfare recipients. Year 12 Economics 2014 © Tim Riley Publications Pty Ltd . The interaction between the social security and personal taxation systems can lead to poverty traps where welfare dependency rises. migrants. M. and the marginal taxation rate (MTR). The opportunity cost of income inequality in Australia is reflected in lower consumption and utility levels for low income earners. Inequality in Australia may be the result of social and economic disadvantage faced by certain groups in the labour market. low income families. large low income families and aged pensioners are the main recipients of welfare. through a higher budget deficit or a smaller budget surplus. A person’s motivation to seek and retain paid work is influenced by a series of complex interactions. J. Research by R. could be corrected by government redistributive policies.e. However the major social cost of income inequality in Australia is the relative poverty of various minority groups.250 Chapter 11: Distribution of Income and Wealth © Tim Riley Publications Pty Ltd Higher incomes in the economy may boost national saving and investment and create more positive conditions for economic and employment growth. The Australian government cut MTRs for low income earners in federal budgets between 2000 and 2009. social security spending on the unemployed and welfare beneficiaries is also finely targeted with the use of strict eligibility criteria such as income and assets tests applied to the recipients of income support. because of the inheritance of wealth or greater access to educational or business opportunities. which may become intergenerational. In macroeconomic terms. the eligibility for other concessions such as rent assistance. and the aged. and generate higher tax revenue (i. where inequality is greater. More businesses may be established or existing businesses expanded as a result of higher economic growth. There are also social costs of inequality such as the emergence of social divisions based upon differences in income. Keynes (1936) argued that deficient aggregate demand. and can be based on ethnic groups and social classes. The major social benefits of inequality accrue to high income households and individuals whose material standard of living and access to lifestyle and personal opportunities is greater than for other groups in society. with the majority of the population earning comparable incomes and enjoying similar standards of living. These groups may feel alienated from market opportunities. The economic costs of inequality are put forward by economists who argue for improvements in the social welfare system and greater opportunities for low income earners to achieve higher market incomes. Australia has been characterised as a very middle class society. leading to an increase in the economy’s productive capacity. if they have insufficient market income to be placed above the poverty line. A growing market economy like Australia may also be able to create more job opportunities for unskilled. A result of this is less discrete social divisions according to differences in income and wealth in Australia. relative to the greater opportunities of high income earners to succeed in the economic system. However increased government spending on welfare can lead to a higher tax burden on taxpayers. Decentralised wage fixing through enterprise bargaining has forced many low paid workers to rely on annual safety net adjustments to the National Minimum Wage for wage annual increases. skilled and professional labour. compared to high and middle income earners. Social tensions can be raised when particular groups in Australian society such as Aborigines and Torres Strait Islanders. There is also evidence in Australia of an underclass of young and middle aged workers who are marginalised in the labour market because of changes to the structure of industry. and the systems of industrial relations and welfare. single parents. and a deterioration in the federal government’s fiscal position. Such interactions can create high effective marginal taxation rates (EMTRs) and reduce the incentive to work. This may be sourced from higher levels of capital formation and a greater rate of technological progress.

200 0% $6.000 37% $180.201–$37. In the 2012-13 budget the Australian government raised the tax free threshold from $6.200 to encourage those on welfare to seek paid work.000 37% $80.000 19% $37. The progressive tax system provides revenue to the government enabling it to redistribute income from high income earners to low income earners. Expenditure on social security by the Australian government represents around 35% of total budgetary expenditure. veterans. The system of progressive taxation of personal income in Australia means that the more income a person earns.© Tim Riley Publications Pty Ltd Chapter 11: Distribution of Income and Wealth POLICIES TO REDUCE INCOME AND WEALTH INEQUALITY The main policy used to reduce inequality in the distribution of income and wealth is known as social policy.6 and were designed to give tax relief to low and middle income earners in dealing with the impact of the carbon tax on the cost of household utilities. In 2012. Tax policy can also be used to lower marginal taxation rates for low income earners and to raise the tax thresholds for low to lower middle income earners. disabled. and the MTR from 30% to 32. family benefits and job search allowances provide income support for groups such as the aged. youth allowances and family benefits.000 to $18.6: Changes to the Personal Income Tax System in the 2012-13 Budget Previous Tax Thresholds Tax Rate New Tax Thresholds Tax Rate (from July 1st 2011) (%) (from July 1st 2012) (%) Income Range MTR Income Range MTR 0 – $6.200. which is based on the tax-transfer system. the tax free threshold was raised from $6.001-$37.000 15% $18. families with children on a single income.001–$180. since they tax fringe benefits and capital gains on a progressive scale through rising marginal taxation rates. The use of fringe benefits tax on fringe benefits such as company cars.001–$180. Budget Strategy and Outlook 2012-13. Targeted and means tested welfare assistance in the form of pensions. The main areas of social security assistance are listed in Table 11. job search allowances. This helps to create a more even distribution of income and wealth. $138.7. © Tim Riley Publications Pty Ltd Year 12 Economics 2014 251 . These tax changes are shown in Table 11. These measures also strengthened the incentive for workforce participation for mature age and young workers and those on welfare.001 + Source: Commonwealth of Australia (2012).5% $37. which provides income support to low income earners. Government support helps these disadvantaged groups to raise their of standard of living. through transfer payments such as old age and disability pensions. as was undertaken in numerous federal budgets in the 2000s. the more tax they pay as a percentage of their gross income. the aged. This refers to the government’s use of the progressive system of taxation.000 to $18.001 + 45% 45% $180. page 5-18.5% in the third tax threshold. These tax changes reduced the tax burden (i.1b was allocated for expenditure on social security and welfare. the unemployed. In Australia there is an absence of death duties.001–$37.000 0% 0 – $18. In the 2013-14 budget. the second tax bracket from $6.001–$80. the MTR from 15% to 19% in the second tax threshold. Table 11.000 to $18. and the system of tax expenditures. and capital gains tax on the real gains from the sale of shares and real estate are taxes on wealth. the sick and the disabled.001–$80.000 30% $80.201-$37.000 32. low income families with children and the unemployed. They assist in redistributing income (like the progressive income tax system).000. other tax thresholds were raised to take into account the growth in incomes over time and the effect of ‘bracket creep’ (where taxpayers pay more tax as they move into higher tax thresholds).e the percentage of income paid in tax) on low and middle income earners relative to high income earners. and in each budget between 2003 and 2012. inheritance taxes or a specific tax on wealth so the government has to rely on progressive taxes to tax wealth.

The growth in assistance to the aged and disabled reflects population ageing. community infrastructure and roads.145m $1.3 Assistance to the Aged Assistance to Veterans and Dependants Total Social Security and Welfare 2012-13 NB: Most welfare payments are indexed to inflation with pensions set at 27. retrenched workers and local communities. Newstart Allowance and Parenting Payments. The government also announced a Jobs and Training Compact to provide labour market assistance to people who were affected by the economic downturn such as young Australians. The Spreading the Benefits of the Boom package was introduced in the 2012 budget to ease cost of living pressures on families and the unemployed.043m -8.3 $132.754m 7.550m 11.945m -0. The Fair Work Commission is responsible for making annual adjustments to the National Minimum Wage which helps to maintain the real wages of low paid workers.984m $54.145m 4. Budget Strategy and Outlook 2013-14.637m -1.7: Expenditure on Social Security and Welfare in the 2013-14 Budget* Type of Assistance 2013-14 Budget (f) %r $50. Families would benefit from an additional $1.5 Assistance for Indigenous Australians $1. the government implemented an Economic Security Strategy which provided stimulus payments to low and middle income earners to support household incomes. the ten National Employment Standards and annual adjustments to the National Minimum Wage provide minimum levels of income and working conditions to workers with low skills and low bargaining power in the labour market.7b Living Longer.5 Assistance to People with Disabilities $23. Source: Commonwealth of Australia (2013). All families receiving FTB Part A with one child will receive an additional $300 per annum.5 Other Welfare Programmes $1.731m -3.046m $7. page 6-31. The ageing of the population is also leading to an increase in the number of people caring for senior Australians and becoming eligible for carer payments.256m $34. The Fair Work Act 2009 introduced ten national employment standards and a new Better Off Overall Test for negotiated enterprise agreements.006m -0.387m $138.8 Assistance to the Unemployed and Sick $8.861m $3. housing. at a rate of $210 per annum for eligible singles and $350 for eligible couples.4 $7. A Nation Building and Jobs Plan in the 2009-10 budget directed $30b in spending to areas such as public schools.8b over three years from 2013-14 to provide an increase in Family Tax Benefit Part A. Year 12 Economics 2014 © Tim Riley Publications Pty Ltd . and families with two or more children will receive $600 per annum. Elements of the social wage such as the safety net of Modern Awards.9 General Administration $3. The continuing demographic shift to an older Australian population as outlined in the 2010 Intergenerational Report continues to contribute to increased government spending on social security and welfare.1b over four years from 2012-13 for a new income support supplement to those receiving payments such as Youth Allowance.7% of Male Total Average Weekly Earnings in the 2010-11 budget. In 2009-10 as the Global Financial Crisis impacted on the Australian economy. This is because more Australians are becoming eligible for the age pension and are entering residential and community care facilities.559m $9.663m $1. The package also provided $1.7 Assistance to Families with Children $35. Living Better aged care reform package in the 2012 budget to improve access to aged care services over the period from 2012-13 to 2017-18.873m $25. In the 2013-14 budget the government introduced the first stage of a National Disability Insurance Scheme called Disability Care Australia to provide personalised care for people with permanent disabilities.479m 6. and a First Home Owners’ Boost to support the housing industry. The government also announced the $3.252 Chapter 11: Distribution of Income and Wealth © Tim Riley Publications Pty Ltd Table 11.

together with the tax-transfer system. age. and ethnicity. To minimise the increasing rate of unemployment in the labour market in the medium term. 5. It made important spending decisions and tax changes as part of its redistributive policy in the 2012 budget and introduced Disability Care Australia in the 2013 budget. 2. and state government provision through subsidised goods and services such as public health. With economic recovery between 2010 and 2012. education. Define the following terms and add them to a glossary: disposable income distribution of income equivalised income Gini co-efficient household disposable income income © Tim Riley Publications Pty Ltd income inequality income quintile income tax threshold Lorenz Curve marginal tax rate (MTR) net worth poverty trap progressive taxation social security and welfare social wage wages wealth Year 12 Economics 2014 253 . occupation. education. Discuss the economic benefits and costs of inequality in the distribution of income in Australia. utilities. the government used expansionary settings of monetary and fiscal policies in 2008-09 to support aggregate demand as the Global Financial Crisis and recession impacted adversely on the Australian economy. To increase public investment in economic and social infrastructure to increase Australia’s productive capacity in the medium to long term. Refer to Tables 11. To support economic growth. How can unemployment affect the distribution of income in Australia? 8. Explain how the distribution of income varies according to gender. the Australian government planned to return the budget to surplus by 2015-16. 2.6 and 11.5 and contrast the distribution of income in Australia in 2011-12 according to the four types of households listed. REVIEW QUESTIONS DIMENSIONS IN THE DISTRIBUTION OF INCOME AND THE ECONOMIC AND SOCIAL BENEFITS COSTS OF INEQUALITY 1. The effective conduct of macroeconomic policy. In terms of general macroeconomic management. the safety net of minimum wages and employment conditions. 9. housing. transport and community services which provide a safety net for low income earners and their families.© Tim Riley Publications Pty Ltd Chapter 11: Distribution of Income and Wealth Other elements of the social wage include government spending on public health. household incomes and living standards in the short term. What is meant by the income life cycle? 3. and 3. Discuss the range of government policies used to reduce inequality in the distribution of income and wealth and the incidence of poverty traps.7 in your answer. and the social wage elements of government spending are important mechanisms for creating a more equal distribution of income and wealth in Australia. 7. housing. transport and community services. These benefits may be in the form of direct federal government provision such as the safety net of the Medicare system for health care. Discuss the social benefits and costs of inequality in the distribution of income in Australia. 6. How does the income life cycle affect the income earning capacity of different household groups? 4. Refer to Table 11. The main priorities were threefold: 1.

3 14. Marks 1. List FOUR separate sources of income that are included in gross weekly income.6 23.38 Refer to the table above of income shares for four types of income unit from the ABS Household Income and Income Distribution for 2011-12 and answer the questions below.3 13.35 Single parent family with children 34.4 31.5 18.9 21.2 11.1 0. (3) Year 12 Economics 2014 © Tim Riley Publications Pty Ltd .9 14.7 0. (2) 3.3 2.6 17.9 13. (2) 5. Discuss TWO costs and TWO benefits of inequality in the distribution of income in Australia.3 28.9 21. Explain what the Gini co-efficient measures.1 18.8 10.7 20.26 Single persons (15 .6 0.8 0. Which type of income unit had the highest level of income inequality in 2011-12? Suggest a possible reason for the high level of inequality in this income unit’s distribution of equivalised disposable household income in 2011-12. (1) 2.31 Couples without dependent children 24.65+ years) 43. Define gross weekly income. (2) 4.254 Chapter 11: Distribution of Income and Wealth © Tim Riley Publications Pty Ltd [CHAPTER 11: SHORT ANSWER QUESTIONS Type of Income Unit Couples with dependent children Equivalised Disposable Household Income Quintiles Lowest Second Third Fourth Highest Gini co-efficient 14.

Wages and salaries were the main source of income for the top four quintiles while social benefits were the main source of income for the lowest quintile. Explain how the distribution of income is measured and discuss the main costs and benefits of inequality in the distribution of income and wealth in Australia. Catalogue 6523. with 7. 52.” Source: ABS (2011).4% going to the middle three quintiles.© Tim Riley Publications Pty Ltd Chapter 11: Distribution of Income and Wealth [CHAPTER FOCUS ON THE DISTRIBUTION OF INCOME AND WEALTH Lorenz Curves for Australia 2009-10 “The distribution of income in Australia was quite unequal in 2009-10. and 40.0. Household Income and Income Distribution 2009-10.4% of total household income going to people in the low income group (the 20% of the population in the lowest income quintile). [CHAPTER 11: EXTENDED RESPONSE QUESTION Discuss the extent of inequality in the distribution of income and wealth in Australia and explain the use of Australian government policies to reduce income and wealth inequality.2% to the high income or top quintile. © Tim Riley Publications Pty Ltd Year 12 Economics 2014 255 .

There are various economic and social benefits and costs of income and wealth inequality. The main sources of wealth or net worth in Australia include owner occupied dwellings and other property. gender. This is especially the case in the distribution of wages and salaries. Higher incomes may also boost savings and investment and promote economic and employment growth and capital accumulation. which measures the extent of inequality in the distribution of income or wealth over time. The distribution of income and wealth is a reflection of how the benefits of economic growth are shared amongst the population as a whole. the value of household contents. occupation. For example. Most democratic societies have in place policies to ensure that inequality is minimised and a social safety net exists to protect those on minimum incomes. The major social costs of inequality include the emergence of social divisions in the community and the alienation of marginalised groups. 3. Year 12 Economics 2014 © Tim Riley Publications Pty Ltd . ethnicity and family structure. Also differences in income have an incentive effect on workers and entrepreneurs to raise productivity or to take more risks in establishing and operating business enterprises. the value of businesses. However the distribution of equivalised disposable household income is less unequal than the distribution of gross income because of the impact of progressive taxation in taking a higher proportion of tax from those on high incomes compared to those on low and middle incomes. interest and dividends). 9. superannuation. A rise in the value (towards unity) of the Gini co-efficient implies an increase in inequality. Redistributive policies are also aimed at reducing the extent of poverty in society. ABS surveys and other research studies suggest that the distribution of wealth in Australia is more unequal than the distribution of income. and motor vehicles. The major economic costs of income inequality include lower consumption and utility by those on low incomes. twin income households tend to have higher incomes than households with a sole person. one parent or only one income earner. 4. because they face high effective marginal taxation rates (EMTRs). Dimensions in the distribution of income include analysis of the distribution in terms of age. property income (rent. 7. 5. whereas a fall in the value (towards zero) of the Gini co-efficient implies a reduction in inequality. A Gini co-efficient can then be calculated. 10. Statistical data from the ABS and other sources indicate that there is a high degree of income inequality in Australia. Some economists argue that income inequality is a natural consequence of a market economy where the highly skilled and educated are rewarded for their contribution to production. There is a link between the distribution of income and wealth in that those earning high incomes are more likely to accumulate wealth and receive non wage forms of income which helps to boost their personal income relative to low income earners.256 Chapter 11: Distribution of Income and Wealth © Tim Riley Publications Pty Ltd CHAPTER SUMMARY DISTRIBUTION OF INCOME AND WEALTH 1. financial accounts. 2. which reduces potential aggregate demand. The Gini co-efficient varies in value from zero to one. This can lead to a greater incidence of absolute and relative poverty amongst low income groups. The social benefits of inequality flow mainly to high income households who experience a higher standard of living relative to low and middle income households. 8. and social benefits receivable (pensions and allowances) paid by the government to households with zero or low levels of income. gross operating surplus and mixed income (profits from business enterprises). who may become dependent on welfare and experience poverty traps. 6. The distribution of income and wealth is measured by economists through the construction of a Lorenz Curve showing shares of income or wealth for equal groupings of the population such as 20% quintiles. The main sources of income in Australia include compensation of employees (wages and salaries). Increased income inequality may also lead to greater welfare spending by the government and a deterioration in the budget balance. shares and trusts.