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"What factors determine the distribution of income in Australia? Discuss the economic and social costs and benefits of inequality in the distribution of income. Evaluate government policies aimed at reducing inequality of income distribution."
Income inequality in Australia is determined by a number of factors. It also has specific cost and benefits. The costs are ameliorated by government policies especially through welfare provision. However, the effectiveness of government policies depends on their context in the economic climate and government policies overall.
Income inequality in Australia can be summarised via the Lorenz curve (see Diagram 1). The curve demonstrates the degree of inequality by calculating the Gini coefficient. It shows that Australia has a fairly unequal distribution of income considering that the further the coefficient is from 0 the more unequal the society. Australia stands at 0.446 (18 figure). Broken down, the lowest quintile earns a .8% share of income whilst the top earns 48.% (see Table 1) However, this information also masks important factors shaping distribution and hence government responses.
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Various factors, including market, institutional and social forces determine the distribution of income in Australia. Across various industries, market forces (in association with boards and unions) can determine income distribution across occupations. The highest paid group is managers and administrators, with a mean weekly income of $7 per week. At the bottom of the table, the lowest paid group consists of labourers and related workers with $480 per week. Furthermore, a clear inequality in the distribution of income according to occupation occurs in the income between men and women in each occupational field, with men on average earning over 15% more than women.
Various institutional forces train and educate people to fit the criteria of particular jobs. Schools are one of the largest institutional forces because they educate young people for a minimum of ten years. Social forces are also important. Due to Australia's multiculturalism, the distribution of income according to ethnic background plays a significant role. For example; overall, incomes of persons born overseas are higher than those who are of Australian origin ($,0 compared to $8,810). However, people from non-English speaking backgrounds generally tend to have lower incomes than those born in Australia ($8,810 compared to $7,50). Average income also differs according to the continent of origin for migrants. Persons of American origin have the highest average income ($1,780), while those of Asian origin have the lowest ($7,50). These factors in many cases prove to equal an inequality in the distribution of income, which cannot always be overcome by conventional government policies.
As shown by the factors discussed above, it is easy to see how high-risk individuals may fall into the poverty cycle. Self-perpetuating poverty significantly contributes to the inequality in income distribution. The cycle is very hard to break out of and is associated with the increased inequality in income distribution. This is because the poor getting less, but with more people stuck in the poverty cycle, there are less qualified persons to work in various industries.
Whilst most people would regard income inequality as a negative phenomenon because of its social costs, there are arguments that various economic and social costs and benefits can be derived from inequality. When looking at the economic benefits, the labour force must increase its level of education and skills. For example, highly skilled specialists can expect to receive more income than a skilled assistant worker does. Thus, income inequality encourages an increase in the quality of the labour force.
The labour force will also be encouraged to work longer and harder as the potential to earn higher income produces an incentive for workers, this may also assist with economic growth. The same goes for entrepreneurs, who receive an extra reward for risk taking, as this means the setting up of new businesses, and expanding existing ones. As labour shortages develop in some industries and surpluses in others, higher income incentives will encourage labour to gain the necessary skills, and make the effort, to move to an industry where it is needed for the economy.
When regarding to the economic costs of inequality we can gather the fact that overall utility is reduced. This is based on the assumption that people on higher incomes gain less utility from an increase in income than people on lower incomes. This is derived from the principle of diminishing marginal utility as more of a good is consumed, it will provide progressively less utility to the consumer.
Keynes saw consumption as "the engine of economic growth, as it allowed for investment and employment". Therefore, greater inequality will lead to lower consumption, lower economic activity and lower living standards. One of the outcomes of inequality is relative poverty. This is where those on the lowest levels of income are comparatively poorer than the rest of society. Relative poverty leads to low self-esteem which may result in people not working to their full capacity or not working at all. An outcome of inequality is government assistance. Australians expect governments to provide a minimum income for the least well off in society, thus around 40% of commonwealth government spending each year is allocated to social security and welfare.
Inequality may also bring social benefits if it promotes a desirable social structure. However since the distribution of income and wealth is not determined in a social system that gives everyone the same level of opportunity, the distribution of income does not accurately reflect the productivity level of individuals. There are three main reasons for the inequality of opportunity in countries such as Australia
1. Existing inequality in the distribution of income and wealth tends to perpetuate inequality of opportunity. For instance, higher income earners may have easier access to better educational resources and assistance which will open up to higher-paid occupations.
. Not everyone has the same mental and physical attributes and therefore the same potential with regard to the acquisition of income and wealth.
. People who acquire wealth through inheritance have a much greater opportunity to build up their wealth through production and investments, as opposed to those who start with no wealth.
The two major social costs of inequality are problems associated with social class divisions and poverty. As Michael Raper states, "Growing inequality is a critical problem for all Australians-not just the poor". Class division can result in tensions between people and between different regions. Wage disputes between workers and management, in which workers try to improve their income level, are a common cause of industrial disputes. These divisions can lead to social and economic upheaval. Whilst Australia does not have significant levels of absolute poverty, many people live in relative poverty. High poverty levels reflect badly on societies and often leads to misery for these in poverty.
Government policies can impact upon the distribution of income throughout society in direct (fiscal and income policies) and indirect ways. Australia offers a safety net which costs around 40% of Commonwealth government spending each year. Social security and welfare gives entitlements and benefits to the unemployed, low income earners, aged pensioners, the disabled, children, students and others. These various welfare policies are backed up by a progressive taxation system, which increases the proportion of income paid in tax as the level of income rises. Since, the impact of government policies aimed at creating a more equitable distribution of income can be outweighed by consequences of other government policies, we must question whether or not income equality seeking policies are a substantial safety net for people who fit into this category.
To counter the distribution of income inequality argument, the government takes on many proactive measures and policies. These include disability pensions, child allowances, subsidised housing, reduced transport fares, pharmaceutical benefits, Medicare system, dole payments, incentive schemes. The government uses these kinds of policies in an attempt to help people get employed and to also be employed at their appropriate work level. So with 40% of the Commonwealth spending, and a bag full of policies why has nothing changed since the 80's where the incomes of the poorest 60% of families fell, while the incomes of the richest 40% rose?
However, there are various forces at work in the economy. Using the employment issue as a small case study, we can see a 50% increase in casual jobs in the past decade. This is mainly due to current industrial aims. For example, a company hires part-time workers to do the work of 1 full time worker to gain a flexible workforce. Part-time workers may be laid-off more easily and also miss out on benefits available to full-time workers. For casuals its even worse since there are practically no benefits and the employer decides when you will and won't work. Currently almost one in four jobs are casual.
In order to attempt to deal with such an alarming issue, the Commission for the Future of Work advocated four main goals for Australia sufficient paid work for all who want it; fair access to paid work; fair and adequate incomes; and a better balance between paid work, unpaid work and other activities. They also proposed a number of reforms including; increased taxes to pay for initiatives such as labour market programs and training; and a central role for the Australian Industrial Relations Commission to restrain wage inflation. These, however directly conflict with the proposed industrial relations and social security reforms of the current Australian government.
Thus, the commission was left with aspirations without any fixed plans. They did however publish reports such as A future that works for all of us which outlines and criticises government policies which claim to work towards a more equitable distribution of income but which conflict with other aspects of the Australian government and the economy, and in this case, profit generating ones.
Overall, the success of government policies depends on what is considered important, especially in terms of the costs and benefits of inequality, as well as the context of government policies within liberalised markets and deregulated industries.
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