Trends in the distribution of income in Australia

Staff working paper

This paper by Jared Greenville, Clinton Pobke and Nikki Rogers was released on 27 March 2013.

The paper examines the recent trends in Australia's individual and household income distributions. It examines the proximate factors that help explain aggregate trends to provide a more detailed understanding of the composition of the income distribution (in terms of both the groups represented within it and the different kinds of income they receive). It also examines whether the Australian experience mirrors general trends across OECD countries.

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Key points
Media release
Contents

Between 1988-89 and 2009-10, the incomes of individuals and households in Australia have risen substantially in real terms and in comparison to trends in other OECD countries, with particularly strong growth between 2003-04 and 2009-10.
- The increase has mainly been driven by growth in labour force earnings, arising from employment growth, more hours worked (by part-time workers) and increased hourly wages.
While real individual and household incomes have both risen across their distributions, increases have been uneven.
- The rate of growth has been higher at the 'top end' of the distributions than the 'bottom end'.
- Incomes for those in the middle of the distribution have spread out (that is, they have become less concentrated around the average).
These changes underlie the recently observed increases in summary measures of inequality (such as the Gini Coefficient) in Australia for individual and household incomes.
- At the individual level, the key drivers are the widening dispersion of hourly wages of full-time employees and (to a lesser extent) the relatively stronger growth in part-time employment.
- At the household level, the key driver has been capital income growth amongst higher income households. The impact of growing dispersion of hourly wages on the distribution of labour income has been offset by increased employment of household members including a decline in the share of jobless households.
Final income is also influenced by government taxes and transfers. These have a substantial redistributive impact on the distribution of household income, substantially reducing measured inequality.
Although the progressive impact of the tax and transfer system declined slightly from the early 2000s (with the introduction of the GST and a fall in the number of recipients of government benefit payments associated with higher employment), real growth in the value of direct and indirect transfers contributed to growth in incomes for low income households.
The analysis highlights the need to examine the changes in various income components and population subgroups in order to understand the changes in the distribution of income and inequality measures such as the Gini coefficient.
- Differences in individual income, and therefore household income levels, occur for a variety of reasons including personal choices and innate characteristics as well as opportunities and inheritances. These differences combine with broader economic forces and policy settings to influence the distribution of income over time.

Background information

Jared Greenville (Research Manager) 02 6240 3263

Strong Labour Earnings Growth Moderates Income Inequality in Australia

Over the past 20 years, the incomes of individuals and households in Australia have risen substantially in real terms. Labour earnings have been the key driver with more Australians in paid employment, working more hours for higher hourly wages, according to a staff paper released by the Productivity Commission.

The Staff Working Paper, Trends in the Distribution of Income in Australia, by Jared Greenville, Clinton Pobke and Nikki Rogers builds on an OECD methodology to analyse changes in the distribution of various forms of income, from labour earnings of individuals to final incomes (inclusive of government payments and in-kind services along with taxes paid) of households.

The authors found that Australia experienced strong income growth across all parts of the distribution over the 20 year period to 2009-10.

In this period, a number of differing trends in distribution are found. At the household level, strong increases in employment have offset the increasing dispersion of individual income, causing measured inequality in household labour incomes to fall. Once capital and other income is taken into account, a small rise has occurred in measured household income inequality overall.

Government taxes and transfers have maintained a significant equalising effect on the distribution of household income. When variation in household size and composition is also factored in, the distribution of final household income is significantly more equal than is observed in individual labour earnings.

While the growing dispersion in full-time earnings in Australia is also observed in other OECD countries, the strong improvement in Australia in both workforce participation and employment, particularly for households in lower income deciles, is not.

Background information

Jared Greenville (Research Manager) 02 6240 3263

Other

02 6240 3330 / media@pc.gov.au

Preliminaries
- Cover, Copyright, Contents, Acknowledgments and Abbreviations
Overview - including key points
Chapter 1 About this study
- 1.1 What this paper is about
- 1.2 Measuring income and its distribution
Chapter 2 Individual income
- 2.1 Trends in labour income
- 2.2 The impact of capital and other income
- 2.3 Earnings of men, women and the top '1 per cent'
Chapter 3 Household income
- 3.1 The distribution of gross household income
- 3.2 What has contributed to the change in the distribution of gross household income?
- 3.3 The contribution of taxes and indirect transfers to the distribution of household incomes
- 3.4 The impact of household composition and family formation on household income
Chapter 4 Australian trends in perspective
- 4.1 The wider context for comparison
- 4.2 Are the trends observed in Australia observed internationally?
- 4.3 Areas for further work
Appendix A Summary measures of the dispersion of income
Appendix B Data and related issues
Appendix C How does Australia compare internationally?
References

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