What is income inequality?
Simply, income inequality is the unequal distribution of income across different people, households or groups in the economy.
But it has become an issue of debate as Australia grapples with slow wage growth and patchy economic performance.
Professor Peter Whiteford, from the Crawford School of Public Policy at The Australian National University emphasised that income inequality reflects - and influences - different trends in society.
"Inequality is not a single thing, its a consequence of lots of different things - those different trends can work in opposite directions at different times.
He gave the example of the growth in earnings by women as something that has increased and decreased household income inequality at different times.
Several decades ago, most of the women with jobs were in relatively well-off households with men who were higher-than-average earners. This had the effect of widening the income disparity between households.
In the past, growing numbers of women workers actually increased household income inequality. Source: H. ARMSTRONG ROBERTS/ClassicStock/Corbis
"But then as women’s earnings continued to increase - that is the proportion of women who had jobs increased - it sort of goes down the income distribution, because that’s the only way it can continue to grow,” he said.
"So women’s earnings relative to other sources of income now reduces inequality, whereas back in the 1990s they tended to exaggerate inequality."
Why is income inequality important?
According to Professor Roger Wilkins, Deputy Director of the Melbourne Institute, income inequality is important for many complex reasons, but the most simple one is that people care about it.
“People are social animals and relativities in economic status matter to them,” he said.
“There is a lot of evidence that people dislike high levels of inequality, particularly when they perceive it to derive from unfair reasons like inheritance, political favours and low educational opportunities.”
For Rob Tyson, an economist who oversees Geospatial Economic Model capabilities at PwC, income inequality in itself is not necessarily important, but how it effects the functioning of society and the economy is.
Expert commentators Source: SBS World News
"If societal factors are entrenching levels of income inequality to a gender, generation, certain physical locations, ethnicities etc, and this leads to reduced levels of opportunity or social mobility, then it is an issue and something which I think everyone would want to avoid."
What problems are caused by high income inequality?
Danielle Wood, a fellow at the Grattan Institute and Chair of the Women in Economics Network at the Economic Society of Australia, said there will always be some degree of inequality, "but if it becomes too pronounced there can be impacts on social cohesion and the health outcomes and wellbeing outcomes of low income earners."
She also argues that high inequality also tends to be related to lower social mobility, or the ability of a person from a lower income background to become a high income earner.
“This is a problem for society because it means we are not making the most of the talent in our ranks."
Professor Whiteford said bad health and lower life expectancy are commonly linked to lower relative incomes, and in societies with high inequality there will be proportionally more people in these lower income groups. However, he warned there are always underlying factors to consider.
"Say for example, it could be that low relative incomes cause bad health, or it could be that bad health causes low relative incomes, so you don’t know which way the causation derives."
Does Australia have an income inequality problem?
Ms Wood said income inequality “somewhat worsened” over the past decade. She described a trend of incomes for well-off households growing faster than for others, but incomes for all low and middle income households - supported in part by an increase in the number of second homes - growing too.
Professor Whiteford said rising inequality at times of growth was less of a concern than rising inequality when the economy is struggling.
He contrasted the recent history of Australia’s expansion in inequality with what happened in New Zealand, Canada, and the UK, which at different times in the 1980s and 1990s experienced jumps in inequality during periods of economic struggle.
“What happened was you had a really big increase in inequality associated with bad times, with high unemployment,” he said.
"Whereas Australia’s increasing inequality happened mainly in the 2000s, when we had very big increase in incomes."
Professor Wilkins noted that while income inequality growth has been “relatively subdued” over the last decade-and-a-half, overall wellbeing could still be increased by raising the incomes of the poorest.
Mr Tyson fears Australia may be developing an inequality problem, as increasing housing costs, education costs, uneven access to certain job opportunities and the erosion an automation of ‘blue collar’ jobs decrease social mobility and intergenerational opportunity.
Why can’t we all agree on Australia’s level of income inequality?
The three key sources of income data to assess inequality are:
- the Household, Income and Labour Dynamics in Australia (HILDA) survey,
- household surveys by the ABS, and
- annual ATO tax return statistics.
There is enough information available to support a range of research... and a range of conclusions.
On top of that, inequality can be explored in a range of measures, such as the amount of income earned by the top one per cent of earners in a group, the Gini coefficient - which is a mathematical measure of inequality that has because an international standard - or simply monitoring average incomes between people or groups over time.
In 2015, a report from the Australian Council of Social Service used ABS data to find Australia’s level of income inequality was above the OECD average, but below countries such as the United States or the United Kingdom, but was “moving in the wrong direction."
Labor MP Andrew Leigh has used tax data to put forward that Australia’s inequality is at a 75-year high.
Others have argued, such as in this article from The Australian, recent HILDA surveys show inequality is not rising in Australia.
"The HILDA survey is more of an outlier, but the other important thing is there are a lot of people who aren’t included in the tax data,” Professor Whiteford said.
"You have to triangulate, so to speak, the different data sources to try to see what they each show, rather than relying on one approach or one data source only."
How can you see income inequality for yourself?
Using ATO data collated by the ABS, SBS World News has produced three interactives that explore differences in pre-tax income and pre-tax income growth by small areas across Australia. These focus on one type of inequality - geographic.
They are designed to be explored one after the other.
The visualisations tell the story of a period of strong incomes and income growth in mining areas and regional incomes generally keeping pace with cities.
The data they use delivers the best available insight into incomes at a local geographic scale, but the information is limited in that it only covers taxpayers.
As a result, the effect of welfare and the experience of groups such as the young, old and unemployed is underplayed.
Ms Wood notes that there will always be challenges representing the concept of inequality, which is based on a range of experiences of different people along the income spectrum.
“Any visualisation of income inequality is based on averages for particular groups and ignores the full set of experiences in a particular region or group,” she said.
