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2014 Y12 Chapter 11 - CD
2014 Y12 Chapter 11 - CD
Chapter 11
Distribution of Income and Wealth
THE MEASUREMENT OF THE DISTRIBUTION OF INCOME
Economists measure the distribution of income and wealth by constructing a Lorenz Curve which
graphs data on income shares for equal groupings of the population or income units (such as 20%
quintiles) as shown in Figure 11.1. The Lorenz Curve has four important properties:
1. It begins at zero, with zero families earning no income or wealth (refer to the bottom left hand
corner of Figure 11.1).
2. It ends where 100% of families earn 100% of all income or wealth (refer to the top right hand
corner of Figure 11.1);
3. The line of perfect equality is a diagonal line showing that the bottom 20% of families account for
20% of all income; the next 20% of families receive 20% of all income; 60% of all families receive
60% of total income (i.e. point C in Figure 11.1) and so on.
4. In reality there are significant differences in the distribution of income and wealth in economies, so
the Lorenz Curve will lie below the line of perfect equality (see Figure 11.1).
The size of the area between the line of perfect equality and the Lorenz Curve (Area A) is used as a
measure of inequality. Any change in the distribution of income or wealth causing the Lorenz Curve
to shift inwards (to the left) would indicate reduced inequality. An outward shift (to the right) of the
existing Lorenz Curve would represent increased inequality. The Gini co-efficient is a mathematical
expression of the degree of income or wealth inequality. It can be calculated by comparing Area A (see
Figure 11.1) with the total area of the triangle bounded by the line of perfect equality and the income
and wealth, and income units axes (Area A + Area B). The Gini co-efficient is calculated as follows:
Area A
Gini co-efficient
=
Area A + Area B
Figure 11.1: The Lorenz Curve
100
80
60
Area A
40
Area B
20
Lorenz Curve
0
20
40
60
80
100
241
242
If there was perfect equality, Area A would not exist and the Gini co-efficient (GC) would be zero i.e.
0
Gini co-efficient =
0 + B = 0
If there was perfect inequality, the whole right side triangle would be equal to Area A, and the value of
the Gini co-efficient would be equal to one i.e.
A
1
Gini co-efficient = A + B = 1 + 0 = 1 (i.e. if the GC is equal to 1 there is perfect inequality)
Therefore the Gini co-efficient has a value ranging between zero (perfect equality) and one (perfect
inequality). An increasing Gini co-efficient (0 to 1) indicates increasing inequality or decreasing equality,
whereas a decreasing Gini co-efficient (1 to 0) denotes increasing equality or decreasing inequality.
% of Total
Gross Income
%r from
2010-11
56.0
6.2
17.5
5.7
149,225
11.8
10.1
122,565
9.7
7.0
30,572
2.4
-4.3
29,567
2.3
20.7
3,903
0.3
-0.8
1,261,388
100.0
6.6
Social benefits accounted for 9.7% of total gross income in 2011-12 and include pensions and other
means tested government allowances (e.g. family benefits), paid mainly to households unable to earn
sufficient market income to sustain a minimum standard of living. Social benefits receivable grew by
7% in 2011-12 as the unemployment rose slightly from 4.9% to 5.2%. Non life insurance claims (2.4%
of the total) are net payments to households from non life insurance policies. Current transfers to
non profit institutions (2.3% of the total) include non capital transfers from government to charitable
institutions. Other current transfers (0.3% of the total) include government transfers to households
not elsewhere classified.
243
244
2011-12
% of Total
$370b
4.3%
$551b
6.4%
$482b
5.6%
$1,323b
15.4%
$5,018
58.5%
$626b
7.3%
Value of vehicles
$212b
2.5%
$8,582b
100.0%
Source: ABS (2013), Household Wealth and Wealth Distribution 2011-12, Catalogue 6554.0, page 22.
Income
pw 11-12
7.8%
7.3%
7.4%
7.5%
($346)
Second
12.7%
12.3%
12.4%
12.6%
($581)
Third
17.4%
16.9%
17.0%
17.3%
($793)
Fourth
23.0%
22.6%
23.0%
23.0%
($1,057)
Highest
39.2%
41.0%
40.2%
39.5%
($1,814)
100.0%
100.0%
100.0%
Gini co-efficient
0.314
0.336
0.329
Source: ABS (2013), Household Income and Income Distribution 2011-12*, Catalogue 6523.0, July.
NB: figures are rounded and do not total * The Household Income and Income Distribution 2011-12 is the latest ABS survey
The ABS survey of the distribution of equivalised disposable household income in Table 11.3 indicates
changes in the shares of income for the five quintile groups between 2005-06 and 2011-12. The lowest
quintiles income share fell by 0.3%, the second quintiles share fell by 0.1%, the third quintiles share
fell by 0.1%, the fourth quintiles share stayed the same at 23%, and the highest quintiles share rose by
0.3%. The Gini co-efficient of 0.314 in 2005-06 rose to 0.336 in 2007-08, indicating an increase in
income inequality of 7% between 2005-06 and 2007-08 due to strong growth in wages and salaries and
unearned sources of income to households in the highest income quintile, relative to those households
in the lowest, second, third and fourth income quintiles. However the Gini co-efficient fell from 0.336
in 2007-08 to 0.329 in 2009-10, and to 0.320 in 2011-12, which was a reduction in inequality of 4.8%
because of tax cuts and increased welfare payments to low income households.
The mean or average equivalised disposable household income in 2011-12 for all households was $918
per week (refer to Figure 11.3). The median income (i.e. the midpoint where all people are ranked in
ascending order of income) in 2011-12 for all households was lower at $790 per week. This difference
reflects the typically asymmetric distribution of Australian incomes which is illustrated in Figure 11.3:
A relatively small number of people have relatively high household incomes; and
245
Mean
$918
% of Households
246
Source: ABS (2013), Household Income and Income Distribution 2011-12, Catalogue 6523.0, July.
Real average equivalised disposable household income for all persons living in private dwellings (22.2m)
in 2011-12, was $918 per week. According to the ABS real average equivalised disposable household
income did not show any significant change between 2009-10 ($894) and 2011-12 ($918). Average
equivalised disposable household income increased from 2009-10 to 2011-12 by 5% for low income
households, and by 4% for middle income households as shown in Figure 11.4. There was little
significant change in average equivalised disposable household income for high income households.
Figure 11.4: Changes in Mean Real Equivalised Disposable Household Income
Source: ABS (2013), Household Income and Income Distribution 2011-12, Catalogue 6523.0, July.
Mean
$728,100
% of households
Median
$434,000
Source: ABS (2013), Household Wealth and Wealth Distribution 2011-12, Catalogue 6554.0, August.
The ABS measures wealth as the net worth of households by subtracting the value of household
liabilities (e.g. loans) from household assets (e.g. cash, bank deposits, homes, superannuation and value
of businesses). The ABS survey of Household Wealth and Wealth Distribution 2011-12 calculated the
mean value of household assets at $858,200, and the mean value of household liabilities (e.g. mortgage
loans and other debts) at $130,100, resulting in average household wealth of $728,100, with median
household wealth substantially lower at $434,000. The distribution of Australian household wealth is
shown in Figure 11.6. Differences reflect the asymmetric distribution of wealth between households:
A relatively small proportion of households had relatively high net worth in 2011-12; and
The distribution of wealth is more unequal in Australia than the distribution of income. Table 11.4
shows quintile shares of household net worth, gross household income per week and equivalised
disposable income per week for 2011-12. While the 20% of households comprising the lowest quintile
accounted for only 0.9% of total household net worth, they accounted for 4.3% of total gross income.
In contrast the 20% of households comprising the highest quintile accounted for 60.8% of total
household net worth, but a lower share of gross household income of 46.5%.
Differences in the distribution of wealth and income partly reflect wealth being accumulated during
a persons working life and being utilised during retirement. Therefore many households with low
wealth have relatively high income, such as younger households. Conversely older households tend
to accumulate relatively high net worth over their lifetimes but have relatively low income in their
retirement, accounting for the top quintiles high share of net worth but lower share of income.
Table 11.4: Shares of Household Net Worth and Income 2011-12
Quintile
Household
Net Worth
Gross Household
Income Per Week
Equivalised Disposable
Household Income Per Week
Lowest quintile
0.9%
4.3%
7.5%
Second quintile
5.2%
9.3%
12.6%
Third quintile
12.0%
15.7%
17.3%
Fourth quintile
21.0%
24.3%
23.0%
Highest quintile
60.8%
46.5%
39.5%
100.0%
100.0%
100.0%
All households
Source: ABS (2013), Household Wealth and Wealth Distribution, Catalogue 6554.0.
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248
REVIEW QUESTIONS
MEASUREMENT, SOURCES AND TRENDS IN THE
DISTRIBUTION OF INCOME AND WEALTH
1. Refer to Figure 11.1 and the text and explain how the distribution of income is measured using
the Lorenz curve and the Gini co-efficient.
2. Distinguish between income as a flow concept and wealth as a stock concept in economics.
3. List the main sources of household income and wealth in Australia. Refer to Table 11.1,
Table 11.2 and Figure 11.2 in your answer.
4. Discuss the relationship between income and wealth.
5. Describe trends in the distribution of equivalised disposable household income between 2005-06
and 2011-12 using the data in Table 11.3.
6. Discuss the main features of the distribution of equivalised household disposable income in
2011-12 from Figure 11.3. Discuss changes in this distribution between 2005-06 and
2011-12 by referring to the text and the trends in Figure 11.4.
7. Discuss the distribution of household net worth or wealth in 2011-12 with reference to the text
and the trends in Figure 11.6.
8. Contrast the distributions of wealth and income in Australia using the data in Table 11.4.
Lowest
Second
Third
Fourth
Highest Mean Weekly
20% quintile quintile quintile 20% Income ($)
Couple with
dependent children
14.9
21.6
23.9
21.5
18.1
$915
Couple without
dependent children
24.1
18.2
11.6
17.3
28.8
$1,030
34.4
31.7
20.8
10.3
2.7
$618
Lone person
43.9
14.3
14.9
13.3
13.6
$747
Source: ABS (2013), Household Income and Income Distribution 2011-12, Catalogue 6523.0, July.
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250
Higher incomes in the economy may boost national saving and investment and create more positive
conditions for economic and employment growth. This may be sourced from higher levels of capital
formation and a greater rate of technological progress, leading to an increase in the economys productive
capacity. More businesses may be established or existing businesses expanded as a result of higher
economic growth. A growing market economy like Australia may also be able to create more job
opportunities for unskilled, skilled and professional labour, and generate higher tax revenue (i.e. the
growth dividend) which the government can use to fund targeted welfare assistance to alleviate poverty.
The major social benefits of inequality accrue to high income households and individuals whose material
standard of living and access to lifestyle and personal opportunities is greater than for other groups in
society. Australia has been characterised as a very middle class society, with the majority of the population
earning comparable incomes and enjoying similar standards of living. A result of this is less discrete social
divisions according to differences in income and wealth in Australia, compared to other countries (such
as the USA and UK), where inequality is greater, and can be based on ethnic groups and social classes.
Inequality in Australia may be the result of social and economic disadvantage faced by certain groups in
the labour market, relative to the greater opportunities of high income earners to succeed in the economic
system, because of the inheritance of wealth or greater access to educational or business opportunities.
The economic costs of inequality are put forward by economists who argue for improvements in the social
welfare system and greater opportunities for low income earners to achieve higher market incomes. The
opportunity cost of income inequality in Australia is reflected in lower consumption and utility levels
for low income earners, compared to high and middle income earners. In macroeconomic terms, J. M.
Keynes (1936) argued that deficient aggregate demand, could be corrected by government redistributive
policies. Greater income inequality in Australia may lead to higher spending on social welfare payments
by the Australian government in supporting the unemployed, low income families, and the aged, if they
have insufficient market income to be placed above the poverty line. However increased government
spending on welfare can lead to a higher tax burden on taxpayers, and a deterioration in the federal
governments fiscal position, through a higher budget deficit or a smaller budget surplus.
There are also social costs of inequality such as the emergence of social divisions based upon differences
in income. Social tensions can be raised when particular groups in Australian society such as Aborigines
and Torres Strait Islanders, the unemployed, migrants, single parents, large low income families and
aged pensioners are the main recipients of welfare. These groups may feel alienated from market
opportunities, and some taxpayers may resent contributing taxes to support welfare recipients. However
the major social cost of income inequality in Australia is the relative poverty of various minority groups.
Research by R. Gregory (1993) revealed evidence of a working poor section of the workforce unable
to earn high incomes because of low skills and a reliance on annual adjustments to Modern Awards and
the National Minimum Wage to increase their income and living standards. There is also evidence in
Australia of an underclass of young and middle aged workers who are marginalised in the labour market
because of changes to the structure of industry, and the systems of industrial relations and welfare.
Decentralised wage fixing through enterprise bargaining has forced many low paid workers to rely on
annual safety net adjustments to the National Minimum Wage for wage annual increases. In addition,
social security spending on the unemployed and welfare beneficiaries is also finely targeted with the use
of strict eligibility criteria such as income and assets tests applied to the recipients of income support.
The interaction between the social security and personal taxation systems can lead to poverty traps
where welfare dependency rises, which may become intergenerational. A persons motivation to seek
and retain paid work is influenced by a series of complex interactions, including the rate at which
income support is withdrawn once work is found; the eligibility for other concessions such as rent
assistance; and the marginal taxation rate (MTR). Such interactions can create high effective marginal
taxation rates (EMTRs) and reduce the incentive to work. The Australian government cut MTRs for
low income earners in federal budgets between 2000 and 2009, raised tax thresholds and reformed the
welfare system to strengthen the incentives for those on welfare to obtain more paid work.
Year 12 Economics 2014
Tax Rate
Tax Rate
(%)
(%)
Income Range
MTR
Income Range
MTR
0 $6,000
0%
0 $18,200 0%
$6,001$37,000
15%
$18,201$37,000
19%
$37,001$80,000
32.5%
$37,001$80,000 30%
$80,001$180,000
37% $80,001$180,000
37%
$180,001 +
45%
45%
$180,001 +
Source: Commonwealth of Australia (2012), Budget Strategy and Outlook 2012-13, page 5-18.
Expenditure on social security by the Australian government represents around 35% of total budgetary
expenditure. In the 2013-14 budget, $138.1b was allocated for expenditure on social security and
welfare. The main areas of social security assistance are listed in Table 11.7. Targeted and means tested
welfare assistance in the form of pensions, family benefits and job search allowances provide income
support for groups such as the aged, veterans, disabled, low income families with children and the
unemployed. Government support helps these disadvantaged groups to raise their of standard of living.
Tim Riley Publications Pty Ltd
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252
Table 11.7: Expenditure on Social Security and Welfare in the 2013-14 Budget*
Type of Assistance
%r
$50,984m
$54,754m
7.4
$7,046m
$7,006m
-0.5
$23,873m
$25,479m
6.7
$35,256m
$34,945m
-0.8
$8,559m
$9,550m
11.5
$1,663m
$1,637m
-1.5
$1,145m
$1,043m
-8.9
General Administration
$3,861m
$3,731m
-3.3
$132,387m
$138,145m
4.3
2012-13
NB: Most welfare payments are indexed to inflation with pensions set at 27.7% of Male Total Average Weekly
Earnings in the 2010-11 budget. The growth in assistance to the aged and disabled reflects population ageing.
Source: Commonwealth of Australia (2013), Budget Strategy and Outlook 2013-14, page 6-31.
The continuing demographic shift to an older Australian population as outlined in the 2010
Intergenerational Report continues to contribute to increased government spending on social security
and welfare. This is because more Australians are becoming eligible for the age pension and are entering
residential and community care facilities. The ageing of the population is also leading to an increase
in the number of people caring for senior Australians and becoming eligible for carer payments. The
government also announced the $3.7b Living Longer, Living Better aged care reform package in the 2012
budget to improve access to aged care services over the period from 2012-13 to 2017-18.
In 2009-10 as the Global Financial Crisis impacted on the Australian economy, the government
implemented an Economic Security Strategy which provided stimulus payments to low and middle
income earners to support household incomes, and a First Home Owners Boost to support the housing
industry. A Nation Building and Jobs Plan in the 2009-10 budget directed $30b in spending to areas
such as public schools, housing, community infrastructure and roads. The government also announced
a Jobs and Training Compact to provide labour market assistance to people who were affected by the
economic downturn such as young Australians, retrenched workers and local communities.
The Spreading the Benefits of the Boom package was introduced in the 2012 budget to ease cost of living
pressures on families and the unemployed. Families would benefit from an additional $1.8b over three
years from 2013-14 to provide an increase in Family Tax Benefit Part A. All families receiving FTB Part
A with one child will receive an additional $300 per annum, and families with two or more children
will receive $600 per annum. The package also provided $1.1b over four years from 2012-13 for a new
income support supplement to those receiving payments such as Youth Allowance, Newstart Allowance
and Parenting Payments, at a rate of $210 per annum for eligible singles and $350 for eligible couples. In
the 2013-14 budget the government introduced the first stage of a National Disability Insurance Scheme
called Disability Care Australia to provide personalised care for people with permanent disabilities.
Elements of the social wage such as the safety net of Modern Awards, the ten National Employment
Standards and annual adjustments to the National Minimum Wage provide minimum levels of income
and working conditions to workers with low skills and low bargaining power in the labour market. The
Fair Work Act 2009 introduced ten national employment standards and a new Better Off Overall Test
for negotiated enterprise agreements. The Fair Work Commission is responsible for making annual
adjustments to the National Minimum Wage which helps to maintain the real wages of low paid workers.
Year 12 Economics 2014
Other elements of the social wage include government spending on public health, education, housing,
transport and community services which provide a safety net for low income earners and their families.
These benefits may be in the form of direct federal government provision such as the safety net of the
Medicare system for health care, and state government provision through subsidised goods and services
such as public health, education, housing, utilities, transport and community services.
In terms of general macroeconomic management, the government used expansionary settings of
monetary and fiscal policies in 2008-09 to support aggregate demand as the Global Financial Crisis and
recession impacted adversely on the Australian economy. The main priorities were threefold:
1. To support economic growth, household incomes and living standards in the short term;
2. To minimise the increasing rate of unemployment in the labour market in the medium term; and
3. To increase public investment in economic and social infrastructure to increase Australias productive
capacity in the medium to long term.
With economic recovery between 2010 and 2012, the Australian government planned to return the
budget to surplus by 2015-16. It made important spending decisions and tax changes as part of its
redistributive policy in the 2012 budget and introduced Disability Care Australia in the 2013 budget.
The effective conduct of macroeconomic policy, together with the tax-transfer system, the safety net of
minimum wages and employment conditions, and the social wage elements of government spending
are important mechanisms for creating a more equal distribution of income and wealth in Australia.
REVIEW QUESTIONS
DIMENSIONS IN THE DISTRIBUTION OF INCOME AND THE
ECONOMIC AND SOCIAL BENEFITS COSTS OF INEQUALITY
1. Explain how the distribution of income varies according to gender, age, occupation,
and ethnicity.
2. What is meant by the income life cycle?
3. How does the income life cycle affect the income earning capacity of different household
groups?
4. Refer to Table 11.5 and contrast the distribution of income in Australia in 2011-12 according to
the four types of households listed.
5. Discuss the economic benefits and costs of inequality in the distribution of income in Australia.
6. Discuss the social benefits and costs of inequality in the distribution of income in Australia.
7. How can unemployment affect the distribution of income in Australia?
8. Discuss the range of government policies used to reduce inequality in the distribution of income
and wealth and the incidence of poverty traps. Refer to Tables 11.6 and 11.7 in your answer.
9. Define the following terms and add them to a glossary:
disposable income
distribution of income
equivalised income
Gini co-efficient
household disposable income
income
income inequality
income quintile
income tax threshold
Lorenz Curve
marginal tax rate (MTR)
net worth
poverty trap
progressive taxation
social security and welfare
social wage
wages
wealth
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254
21.6
23.9
21.5
18.1
0.31
18.2
11.6
17.3
28.8
0.35
34.4
31.7
20.8
10.3
2.7
0.26
43.9
14.3
14.9
13.3
13.6
0.38
Refer to the table above of income shares for four types of income unit from the ABS
Household Income and Income Distribution for 2011-12 and answer the questions below.
Marks
(1)
2. List FOUR separate sources of income that are included in gross weekly income.
(2)
(2)
4. Which type of income unit had the highest level of income inequality in 2011-12?
Suggest a possible reason for the high level of inequality in this income units
distribution of equivalised disposable household income in 2011-12.
(2)
5. Discuss TWO costs and TWO benefits of inequality in the distribution of income in Australia. (3)
The distribution of income in Australia was quite unequal in 2009-10, with 7.4% of total
household income going to people in the low income group (the 20% of the population in the
lowest income quintile), 52.4% going to the middle three quintiles, and 40.2% to the high
income or top quintile. Wages and salaries were the main source of income for the top four
quintiles while social benefits were the main source of income for the lowest quintile.
Source: ABS (2011), Household Income and Income Distribution 2009-10, Catalogue 6523.0.
Explain how the distribution of income is measured and discuss the main costs and benefits of
inequality in the distribution of income and wealth in Australia.
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256
CHAPTER SUMMARY
DISTRIBUTION OF INCOME AND WEALTH
1. The distribution of income and wealth is a reflection of how the benefits of economic growth are
shared amongst the population as a whole. Most democratic societies have in place policies
to ensure that inequality is minimised and a social safety net exists to protect those on minimum
incomes. Redistributive policies are also aimed at reducing the extent of poverty in society.
2. The distribution of income and wealth is measured by economists through the construction of a
Lorenz Curve showing shares of income or wealth for equal groupings of the population such as
20% quintiles. A Gini co-efficient can then be calculated, which measures the extent of inequality
in the distribution of income or wealth over time. The Gini co-efficient varies in value from zero to
one. A rise in the value (towards unity) of the Gini co-efficient implies an increase in inequality,
whereas a fall in the value (towards zero) of the Gini co-efficient implies a reduction in inequality.
3. The main sources of income in Australia include compensation of employees (wages and salaries);
gross operating surplus and mixed income (profits from business enterprises); property income
(rent, interest and dividends); and social benefits receivable (pensions and allowances) paid by
the government to households with zero or low levels of income.
4. The main sources of wealth or net worth in Australia include owner occupied dwellings and other
property; the value of businesses; superannuation; financial accounts; shares and trusts; the value
of household contents; and motor vehicles.
5. Statistical data from the ABS and other sources indicate that there is a high degree of income
inequality in Australia. This is especially the case in the distribution of wages and salaries. However
the distribution of equivalised disposable household income is less unequal than the distribution of
gross income because of the impact of progressive taxation in taking a higher proportion of tax
from those on high incomes compared to those on low and middle incomes.
6. ABS surveys and other research studies suggest that the distribution of wealth in Australia is more
unequal than the distribution of income. There is a link between the distribution of income and
wealth in that those earning high incomes are more likely to accumulate wealth and receive non
wage forms of income which helps to boost their personal income relative to low income earners.
7. Dimensions in the distribution of income include analysis of the distribution in terms of age, gender,
occupation, ethnicity and family structure. For example, twin income households tend to have
higher incomes than households with a sole person, one parent or only one income earner.
8. There are various economic and social benefits and costs of income and wealth inequality. Some
economists argue that income inequality is a natural consequence of a market economy where the
highly skilled and educated are rewarded for their contribution to production. Also differences
in income have an incentive effect on workers and entrepreneurs to raise productivity or to take
more risks in establishing and operating business enterprises. Higher incomes may also boost
savings and investment and promote economic and employment growth and capital accumulation.
The social benefits of inequality flow mainly to high income households who experience a higher
standard of living relative to low and middle income households.
9. The major economic costs of income inequality include lower consumption and utility by those on
low incomes, which reduces potential aggregate demand. Increased income inequality may also
lead to greater welfare spending by the government and a deterioration in the budget balance.
10. The major social costs of inequality include the emergence of social divisions in the community
and the alienation of marginalised groups. This can lead to a greater incidence of absolute
and relative poverty amongst low income groups, who may become dependent on welfare and
experience poverty traps, because they face high effective marginal taxation rates (EMTRs).