Measuring the income divide: how does Australia compare?

Inequality and poverty are topics widely debated, and there is a strong community perception that the gap between rich and poor is growing. How accurate is this perception, and how does Australia compare with other countries? And if the gap is growing, does it matter? This article discusses trends in income inequality in Australia over the last twenty years, and compares the Australian experience with other OECD countries.

There are several types of income. ‘Wage and salary earnings’ refers to before-tax income from work, ‘gross income’ covers before-tax income from all sources, and ‘disposable income’ refers to income after tax and social security are paid (Saunders 2001). A separate analytical issue is how income for families of different sizes should be compared. Families living together can achieve a higher standard of living on the same income per person as someone living alone, because they can share the cost of heating, rent, cooking and so on. This issue is addressed by calculating ‘equivalent household income’ based on a set of equivalence scales which vary with the size of the household and the number of children.

Studies of income inequality generally use equivalent household disposable income as the measure of income. The measure of inequality most often used is the Gini coefficient. Theoretically, this could range from 0, which would mean that income was distributed equally among all people, to 1 which would imply that one person received all income. An increase in the Gini coefficient suggests that income is becoming more unevenly distributed.

Saunders (2001) analyses recent trends in income inequality in Australia. Table 1 shows changes in the distribution of income over the last decade by presenting data on the change in Gini coefficients for different types of income.

Table 1. Changes in distribution of household weekly income 1990 – 1999/2000 Gini coefficients.

Source: Saunders (2001) - Includes only full-time workers

Clearly, there was a large increase in inequality in full-time wages – an increase of almost 23 per cent over the decade, or an average of around two per cent each year. There was a smaller but still significant increase in the inequality of the distribution of equivalent disposable income over the same period. This suggests that the tax-transfer system has played an important role in limiting overall inequality in the face of a major change in earnings inequality. These figures from an analysis by Saunders are very similar to those derived from another study by Harding and Greenwell (2001) which show an increase of 0.53 per cent per year in the Gini coefficient for equivalent disposable income over the last decade, despite some differences in data and methods.

Why has earnings inequality increased so dramatically?

A few key factors contributed to earnings inequality. There has been an increased demand for more highly skilled workers, causing the wages of this group to rise dramatically. The move to individual and enterprise bargaining has rewarded those with greater bargaining power. As women have gained better paid jobs, an even wider gap has developed between high-income households with two wage-earners and low-income households where neither partner has a job (Dawkins and Scutella 2001).

How does income inequality in Australia compare with other industrialised countries?

Figure 1 shows increases in inequality in equivalent disposable income for several OECD countries. It should be noted that the figures for Australia refer to the period 1989-1999, while the other countries cover the period from 1979 to the mid-1990s. Australia’s rate of increase in inequality exceeded all of the other countries covered by Burtless’ study (2001).