With the “Occupy X” rallies gathering momentum and attention, inequality is suddenly a prominent political issue. It’s pretty clear what people in the US are angry about – their unemployment rate is high, growth prospects are low, inequality is high and rising. Business Insider has a good summary of America’s economic and social problems, in chart form.
It’s important to bear in mind that Australia is not the US. Inequality here is lower than in the US, social mobility is much higher; the unemployment rate is much lower. Whereas real median wages in the US have stagnated for decades, we’ve seen fairly solid real income growth across the income distribution. I think that Australians who are concerned about rising inequality should be aware of the facts, so as to avoid making overblown and unsubstantiated claims. It’s easy to dismiss people’s arguments if they’re based on a misunderstanding of the facts.
Below, I set out some facts about income inequality (as distinct from wealth inequality, which is quite a bit higher than income inequality in Australia and elsewhere).
The share of income going to the top 1% in Australia has doubled in the past 30 years or so. [fn1]
According to the ATO’s tax statistics, if you earned $248 192 or more in 2008-09, you were part of the top 1%. The average income for an individual in the top 1% of taxpayers was $554 185. The median income for that year was $45 200, so the average income for someone in the top 1% was more than 12 times the median.
Top 1% income share in Australia
This is a pattern common to many developed countries – a ‘great compression’ in the three decades or so following World War 2, and then a ‘great divergence’ beginning in the late 1970s or early 1980s.
Even though the pattern is the same, the extent of the compression and divergence has been quite different across countries. The US is the extreme example. At the end of WW2, their top 1% had about the same proportion of total income as Australia’s top 1%, but our great compression was more pronounced and lasted longer than theirs. Our great divergence has also been less severe. Our top 1% has increased its share of income from around 5% to around 10% in the past 30 years, whereas the top 1% in America has increased its share from about 8% in 1981 to around 18% in 2007. Note that figures which include capital gains put the 1% share in the US closer to 25%.
Top 1% income share in Australia and the US
When you add in the other OECD countries, it looks like Australia’s top 1% income share is around the middle of the pack. It’s important to bear in mind here that these figures relate to pre-tax income; countries that have a similar pre-tax distribution but differing degrees of redistribution through the tax and transfer systems will end up with very different levels of inequality in net incomes.
Top 1% income share in OECD countries since WW2
It’s a bit hard to figure out which country is which in that tangle of coloured spaghetti, so the chart below shows the top 1% income share for selected OECD countries in 2005. I chose 2005 simply because that’s the most recent year for which the World Top Incomes Database has information for more than a handful of countries. Again, this shows Australia as middle of the pack among developed nations for the share of gross income going to the top 1%. [UPDATE: A helpful reader pointed out that Norway's top 1% share spiked in 2005 due to tax changes in 2006, as can be seen in the chart above].
Top 1% income share in selected OECD countries in 2005
Of course, the top 1% income share is a very interesting piece of information, but it doesn’t tell us anything about the distribution of income among the rest of the 99% of the population. To get a more complete picture of income inequality, we need to use a measure like the 90:10 ratio or the Gini coefficient. A Gini of 0 implies perfect equality of incomes (everyone has the same income), whereas a Gini of 1 implies perfect inequality (one household has all the income). The closer a country is to a Gini of 1, the less equal its distribution. The data here are for net incomes, after taxes and transfers, and are based on household income, adjusted for household size. [fn2]
Measured using the Gini, our level of inequality (0.3) in the mid-2000s was slightly below the OECD average (0.31), but in a similar bracket to most European countries. Our level of inequality was below the level of most other English-speaking countries, and significantly below the United States (0.38). Although our income tax system has become less redistributive in the past decade or so, the tax and transfer systems as a whole still reduce inequality quite a bit in Australia.
Gini coefficient in OECD countries in the mid-2000s
Although inequality in Australia was middle-of-the-pack in the mid-2000s, the Gini in Australia has been drifting upwards. It rose from from around 0.29 in the mid-90s to around 0.33 in 2009-10. Between 2003-04 and 2009-10, the Gini in Australia increased by 0.022 points, a 7.2% increase in inequality.
Over this period, the share of household income going to the top 20% of households increased from 38.4% to 40.2%, after reaching 41% in 2007-08. In 2003-04, a household at the 90th percentile of the income distribution had 3.87 times the income of a household at the tenth percentile. In 2009-10 this ratio was 4.21 times. This increase in inequality has happened during the mining boom period, and also during a period in which the income tax system was flattened out a fair bit. It’s likely that both factors have contributed to the rise in income inequality in the mid-to-late 2000s.
The OECD inequality data currently don’t go beyond the mid-2000s, so it’s difficult to say whether other countries have also become less equal over the same period.
Gini coefficient in Australia – mid 1990s to late 2000s
One of the most biggest problems associated with higher inequality is lower social mobility – the longer the ladder between top and bottom, the harder it is to make it to the top. Researchers measure this mobility as the relationship between an individual’s earnings and his or her parents’ earnings. If this is 1.0, then your income can be predicted with 100% accuracy based on what your parents earn. This implies no social mobility. If the figure is 0, then your earnings have no relationship to your parents’ earnings, implying high mobility. Australia has a moderate level of social mobility, according to research by Andrew Leigh, with an intergenerational elasticity of earnings in the range of 0.2 to 0.3. Dr Leigh explains:
In other words, a 10% increase in a father’s earnings translates into a 2-3% increase in his son’s earnings. In terms of international rankings, this suggests that Australia is more socially mobile than the US (IGE=0.4-0.6), less socially mobile than Scandinavia (IGE=about 0.2), and approximately as socially mobile as the UK. Given that’s where we fit in the inequality rankings, this feels about right to me.
I’ve written before about my belief that inequality matters. Even if we manage to eliminate absolute poverty within a country, inequality can still have pernicious effects on society and on individuals. One of the most harmful potential effects is that, over time, large inequalities of outcomes can undermine equality of opportunity, making it less likely that hard working, smart kids from poorer backgrounds will have a chance to achieve their potential. However, it’s important to keep the debate in perspective, at least as far as Australia is concerned. Income inequality here is rising, but it’s still relatively moderate. We should be vigilant to make sure that that our relatively egalitarian society stays that way.
NOTE: An earlier version of this post used a chart from the OECD to suggest that Australia’s level of intergenerational social mobility is relatively high. The OECD report used underlying data from a working paper by Andrew Leigh. The final version of his paper had a different finding about the level of mobility, but unfortunately the OECD report remains online with the original chart intact. I have updated my post to take account of this. Dr Leigh explains the whole situation here.
[fn1] The charts on the income shares of the top 1% are based on data from the World Top Incomes Database.
[fn2] Equivalised household disposable income is used for the OECD Gini data.