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A World of Difference: Why Some Australians Keep Getting Richer

Published: February 05, 2012 in Knowledge@Australian School of Business
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Barack Obama has thrust income inequality into the centre of this year's presidential election, using his recent State of the Union address to call for the richest Americans to carry a greater tax load so "everyone gets a fair shot". "The US is an outstanding case of economic growth not being shared fairly," the president recently told US television program 60 Minutes. At the centre of the problem, Obama's official campaign website notes, is tax. "For too long, the US tax code has benefited the wealthy and well-connected at the expense of the vast majority of Americans," the site says.

The income share of the top 1% of wealthy Americans is twice as high as it is for their Australian counterparts. Yet the issue also resonates in Australia where the  rich are getting richer – the top 1% of income earners have seen their share of total national income almost double, from 4.8% in 1980 to 8.8% in 2008. It's a problem happening across the globe – most of the 30 developed countries in the Organisation for Economic Co-operation and Development (OECD) experienced this same drift towards higher inequality over the past 20 years. However, in Australia  the trend has gathered pace. In the three years to 2008, the level of inequality in Australia jumped from midway on the scale of the 34 OECD countries into the top quartile. The top 10% of Australians now earn A$131,300 per annum, while the bottom 10% earn A$13,700.

Free marketeers argue inequality is simply part of capitalism and that competitive societies reward winners, generating a higher standard of living overall. Yet a majority of Australians are concerned about the growing gap between the rich and the poor, and favour a more equal society, according to an Australian Council of Trade Unions study that replicated American research findings showing a worrying trend towards widening disparities. Australian Bureau of Statistics income surveys reveal that the richest 20% of Australians gained 44% of all the growth in household income from the mid-1990s to 2010, a symptom of growing inequality. And in the US the trend is further advanced, according to research by Emmanuel Saez, director of the Centre for Equitable Growth at the University of California, Berkeley. America's richest 1% of households captured 50% of all the income growth between 1993 and 2007.

Historically, Australians have been more concerned about the growing disparity of income than Americans. Yet plenty of Americans are worried too. The Occupy Wall Street demonstrations against economic and social inequality were sparked in September 2011 and swept to 82 nations by year's end, reaching several Australian cities including Melbourne and Sydney.

A fair go is seen as a core Australian value. Australians like to think they are egalitarian, that they treat people in the same way, but this is not the same as equality, according to Peter Whiteford, director of the Social Policy Research Centre at the University of New South Wales. "Inequality has risen in Australia since the 1980s," says Whiteford. "Australia's national income has been going up in leaps and bounds since the mining boom started, but higher inequality means more of those gains go to the rich. Yet the increase in US inequality has been much faster. We have only reached the level of America's (income inequality) in 1979." However, if Australia keeps going along the same path, it's possible it will arrive at the level of disparity facing the US, cautions Whiteford.

Spot the Disparity

Some say Australians have never had it so good – and Whiteford believes there's some truth in that statement. Household income has fallen only slightly since the global financial crisis. So far income gains have been widely spread. The richest 10% have done the best, but other income groups have done well, too. "We have had a massive boost in our incomes over the past 15 years, particularly after 2003," Whiteford says. "From 2003 to 2007, just about all income groups saw incomes increase by more than 25% after inflation. But if you were in the top 10% of households, your real income increased by 40%, which is incredible."

On the plus side wealth is more equally spread in Australia than in the US. Average net worth in 2005-06 was about A$563,000, or 66% higher than the median net worth of about A$340,000. In the US, by contrast, Federal Reserve research found that in 2007 average net worth was US$595,000, but median net worth was US$125,000, a difference of nearly five to one.

Not everyone in Australia has benefited from the boom. Those most likely to have missed out on sharing the good times are the unemployed, divorced, retired or people with an illness or a disability. And there are regional differences. Overall incomes have risen most in Western Australia because of the mining boom. In Tasmania and the Australian Capital Territory, incomes are more equal.

Drilling down even further reveals an increasing inequality within groups in society. By gender, age, occupation, industry, region and education – all groups have suffered rising inequality, observes Denise Doiron, an associate professor at the Australian School of Business. While top salaries were growing, those at the bottom were not growing, and middle-income earners wages were growing somewhat, show Australian Bureau of Statistics (ABS) figures. The rise in employment helped, but could not compensate for the uneven wage increases.

"People in management, in supervisory roles, financial planning, and those kinds of occupations have had huge increases in salary, much more rapid than other occupations, and that has meant the top incomes are rising very quickly," Doiron notes. "Inequality has been growing more rapidly in the US, where employment is stagnating, even declining – and in the UK as well. Nordic countries have much more centralised wage determination systems, so they have tended to experience much flatter inequality trends."

History reminds us that the factors producing higher or lower inequality can change in unpredictable ways, Whiteford points out. Inequality actually fell substantially in Australia between the 1940s and the 1970s. While the cumulative picture since the 1980s displays an upward trend, it has been punctuated by periods in which inequality has fallen. That happened in the second half of the 1980s, the second half of the 1990s, in the early 2000s, and most recently in 2009 and 2010. "These figures show that the common view of the past 30 years – that 'the rich have been getting richer and the poor poorer' – is not an entirely accurate description of what has happened in Australia," Whiteford says. "Rising inequality has different causes in different periods."

Techno-powered Divide

While unemployment and poor economic performance makes inequality more of an issue in the US, some of the same forces are at work in Australia – such as globalisation and a decline in manufacturing. Australia's high dollar has been a blow to local manufacturing, and there is pressure on factory jobs, which have a narrower distribution of wages than service industry jobs – these can range widely from highly paid bank executives to cleaners. A new OECD report, Divided We Stand: Why Inequality Keeps Rising, links growing income disparities to technological advances, which have been more beneficial for workers with higher skills, thus driving wider wage dispersion. Robert H. Frank, an economics professor at Cornell University's Johnson School of Management in the US, says computerisation has extended the reach of the most gifted performers among workers in every arena, combined with an increasingly open competition for their services.

The OECD report exonerates globalisation as a cause per se. For Australia, it argues the growth in inequality since 2000 has been driven by two forces in different periods: widening disparities of market incomes (gross earnings, savings and capital) between 2000 and 2004, and weakening redistribution (through tax and benefits) since 2004. These taxes and benefits now reduce inequality by 23%, which is about the OECD average. The report labels labour market changes as the key driver of inequality trends, noting, for example, that collective bargaining has replaced centralised wage fixing in Australia.

Societal changes such as more single parent families, people living alone and people marrying within similar earnings classes also contributed to rising household earnings inequality in Australia. At the same time, more women working helped reduce household earnings inequality. It was a different story for men though –growing disparities and declining male employment rates have been the main drivers for about two-thirds of the increase in Australia's inequality. Noteworthy too, was the amount of hours that big wage earners do – workers taking home the biggest pay packets recorded more than twice as many hours as low-wage employees. Since the mid-1980s, annual hours of low-wage workers have fallen from 1300 to 1100 hours, while those of higher-wage employees have remained stable at around 2300 hours.

The tax and benefits system in Australia has offset just over half of the rise in income inequality during the past two decades, a percentage that is higher than in many other OECD countries. However, the flattening of the personal income tax system in the mid-2000s (for example, through increases to the top income threshold) reduced the nation's capacity to redistribute income. The report says spending on public services such as education and health cut inequality by 17%, a little less than the OECD average.

Whiteford believes Australia's welfare system is more targeted to low-income people than any other rich country. "But we have not done as well in help for the unemployed," he says. "The basic payment is indexed to prices and has not taken account of Australia's rising incomes. So it is now 36% of median income when it was 46% 15 years ago. Inequality is relative, falling behind the rest of society."

Australia's total spend on social protection is about 85% of the OECD average – mainly due to much lower spending on age pensions. While spending is lower than in the US, Japan or Canada, Australia relies on income testing more than any other OECD country, and has the most progressive structure of benefits of all OECD countries. It means Australia is nearly as effective in reducing inequality as the Nordic countries. "Australia has less 'middle-class welfare' than any other country," observes Whiteford. "But what we call 'middle-class welfare', Europeans call social insurance and Americans call social security. In targeting and focusing on poverty alleviation, we do less in public spending for the middle than most other countries."

Age and Affluence

The OECD says the most substantial shifts in poverty over the past two decades are between age groups. The risk of poverty for older people has fallen, while poverty of young adults and families with children has risen. In Australia, inequality among old people was much lower that the general population but has grown since 2000 partly because those with superannuation have done much better than those without. Those on retirement incomes linked to the share market also benefited from the boom between 2003 and late 2007, when the All Ordinaries Index rose by about 140%. The global financial crisis drove down inequality by forcing a 30% fall in the stock market from its peak. Another factor was the large increase in the value of the single age pension in the 2009 federal budget.

After a decade that celebrated the rich and famous, the OECD advocates rebalancing society for the other 99% through job creation, continuing education, redistributive benefits, more tax on high-income earners and freely accessible and high-quality public services, such as education, health and family care. Traditionally, the social safety net covered unemployment, disability and poverty in childhood and old age, Whiteford observes, but these assumptions no longer correspond to reality in Australia and the majority of OECD countries. Divorce is among new life risks as individuals and families feel under increasing pressure to combine family roles and employment successfully. In "the rush hour of life", individuals may seek personal solutions to extra time or money demands, such as by delaying childbearing, by having smaller families or having one spouse scale back work hours. "The welfare state can cushion the consequences of some important events; for example, social transfers can mitigate the effects related to the loss of income related to unemployment; or publicly financed childcare services can help households to reconcile work and family life," says Whiteford.

"Australia is not in the same league as the US but we should not be complacent. Politicians talk a lot about income growth, but less about inequality. But you cannot assume if GDP goes up, everyone's incomes will rise correspondingly," says Whiteford. "If you want as many people as possible to benefit from economic growth, then governments need to take active steps to improve the distribution of outcomes."

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