Income inequality is growing. Can it really be reversed?

Income inequality is growing. Can it really be reversed?

There is no shortage of policy 'fixes', but few governments are brave enough to try them.

Along with international security, terrorism and climate change, the issue of growing inequality is assuming increasing prominence, and indications are that it will feature as a key policy focus in the next federal election campaign.

Opposition Leader Bill Shorten has made repeated references to inequality in recent weeks, suggesting Labor will seek to shape the agenda before the next election, likely to be late next year.

Opposition Leader Bill Shorten says tackling inequality will be Labor's defining mission.

Opposition Leader Bill Shorten says tackling inequality will be Labor's defining mission.Credit:Daniel Munoz

Two recent reports on inequality in Australia have added impetus to the emerging debate. Last month, the ACTU released Rising Inequality: An Australian Reality, which warned that Australians face growing wage inequality and the threat of an American work culture.


The ACTU says income inequality is at its greatest level in 70 years, with most Australians experiencing a decline in living standards and job security, making it "the challenge of our time". Unless it was addressed, Australia was at risk of becoming an "Americanised society" characterised by "high inequality and dead-end jobs, with long working hours, no holidays, zero job security and poverty pay levels".


"These are the economic conditions that breed high levels of crime, discrimination against minorities and a broad range of social problems ... Australia must not go any further down this path. Instead, we must return to being a country in which families on a normal income can afford to buy a home, provide a good education for their kids and have a decent standard of living," the report says.

Citing Organisation for Economic Co-operation and Development data, the ACTU report says that since the mid-1990s, income inequality in Australia has worsened worse, with real incomes for the top quintile of households growing by more than 40 per cent between 2004 and 2014 while those for the lowest quintile growing only by about 25 per cent.

"Despite a blip just after the global financial crisis, when share prices fell for a short period and those rich enough to make lots of income through their investments took a hit, it is the clear that the general trend has been towards widening income inequality," says the report, which notes that rapid increases in the value of property, shares and other assets means wealth inequality has increased more sharply than wages inequality.

Another report – the Melbourne Institute for Applied Economic and Social Research's survey of household income and labour dynamics in Australia – shows a more mixed picture, although highlighting certain areas of concern, including income stagnation, increasing mortgage debt, declining home-ownership rates and later retirement ages.

The survey, funded by the federal Department of Social Services, found that the real income of households was now lower than it was in 2009. And while the measure of income inequality appeared stable, a drastic decline in home ownership for people aged under 40 highlighted the widening economic disparity between those who owned homes and those who did not.

The report's calculation of the annual Gini coefficient, which records income inequality, fell slightly in 2015, putting it where it has been since 2001. But the survey also measures income inequality over five-year periods to get a clearer picture of ongoing inequality and, on this score, inequality has risen slightly since 2001.

Professor Roger Wilkins, the report's author, notes that earnings inequality has increased, with a marked shift to part-time work and underemployment, but said inequality overall had remained relatively steady despite those forces, because of progressive taxation and more low income people gaining employment. "Since the [global financial crisis], that hasn't translated into increased inequality in incomes and that's very much because we've done a very good job of keeping employment-to-population rates quite high," he observed.

However, while the gap between the rich and poor had not widened markedly in recent times, Wilkins said the same could not be said of the old and young. "One of the more concerning trends is a growing wealth divide by age group," he said. "It's very much connected to what's going on in the housing market."

At the top of Stiglitz's hit list is rent-seeking – increasing wealth by taking it from others rather than generating any actual economic activity.

Home ownership for those aged under 40 has plunged from 36 per cent to 25 per cent since 2002.

Another area of inequality is that based on gender. An analysis of this year's federal budget by the National Foundation for Australian Women shows women continue to experience less financial security than men and younger women face a lifetime of wage inequality.

"There has been no effort to improve gender inequality by the Turnbull government and budgetary decisions effectively mean there is a disproportionately negative effect on women who are already over-represented at the lower-income levels," the foundation said. "For example, a female graduate with a HECS debt, who also has children, would experience a significant drop in take-home pay, also decreasing her superannuation savings over her lifetime. Tax cuts for high-wage earners will result in decreases in government support, which disproportionally affects women."

According to the foundation's analysis, women already:

  • earn 9.4 per cent less than men at graduation;
  • have a third less in retirement savings than their male counterparts;
  • do 76 per cent of the work in the $345 billion unpaid-work economy; and
  • earn $26,853 less than men on average.

The foundation said the gender gap had widened the Coalition came into power in 2013; Australia had slipped from 19th to 46th place in the Global Gender Gap Report.

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There is no shortage of policy prescriptions to address what is increasingly seen as a global phenomenon. Since the ground-breaking 2013 work by French economist Thomas Piketty, Capital in the Twenty-First Century, which focuses on wealth and income inequality in Europe and the United States, there has been something of a publishing explosion, involving some of the most illustrious names in economics.

Nobel-winning American Joseph Stiglitz has been at the forefront, with The Price of Inequality: How Today's Divided Society Endangers Our Future (2013), Rewriting the Rules of the American Economy: An Agenda for Growth and Shared Prosperity (2015) and The Great Divide: Unequal Societies and What We Can Do About Them (2016).

In Rewriting the Rules of the American Economy, Stiglitz describes the current situation as "a stark picture of a world gone wrong", noting that 91 per cent of all income growth between 2009 and 2012 was enjoyed by the wealthiest 1 per cent of Americans. Looking at how this came about, Stiglitz identifies the demise of labour unions, the increasing financialisation of the economy, and the lack of wealth-building opportunities in minority communities – each of which has made the rich richer while leaving everyone else to flounder. He lists other contributors, too: weak wages, ineffective regulation and federal oversight, and a focus on short-term versus long-term growth, which embodies a preference for rewarding shareholders over workers and consumers.

As to possible remedies, Stiglitz is adamant that behaviours must be changed. At the top of his hit list is rent-seeking – the practice of increasing wealth by taking it from others rather than generating any actual economic activity. Lobbying, for example, allows large companies to spend money influencing laws and regulations in their favour, but lobbying itself does nothing for the economy apart from creating a handful of jobs in Washington; it produces nothing but helps an already rich and influential group grow even richer and more influential. Stiglitz says reducing rent-seeking is critical to reining in inequality, especially when it comes to complex issues such as housing prices, patents and the power that large corporations wield.

To address these behaviours and the policies that support them, Stiglitz says America should give up what he calls "the incorrect and outdated" belief in supply-side economics, which grows from the premise that regulation and taxes hamper business opportunities and economic growth. Instead, radical changes to tax laws, regulations and the financial sector are needed, he says, to curb rent-seeking. For instance, increasing tax rates, ending preferential treatment for top earners and refining the tax code would decrease incentives to amass extreme amounts of wealth, because it would be so heavily taxed, and that tax would be difficult to avoid.

Stiglitz suggests a 5 per cent increase to the tax rate of the top 1 per cent of earners – a move he says would raise as much as $1.5 trillion over 10 years. He also calls for a "fair tax", which would eliminate preferential tax treatment for money earned from capital gains and dividends – perks enjoyed primarily by people who can afford to own a lot of stock.

The Stiglitz agenda also includes: re-emphasising the goal of full employment rather than focusing on the sometimes reductive unemployment figures; investing in public infrastructure; better access to financial services, childcare, healthcare and paid leave; and strengthened opportunities for collective bargaining.

Another luminary, the late Sir Tony Atkinson, who died this year, was adamant in his Inequality: What Can Be Done? (2015) that, with the appropriate policy settings, the problems of inequality were not insurmountable. Hailed by Piketty as "the godfather of modern research on the distribution of income and wealth", Atkinson proposes 15 radical proposals to address runaway inequality, including a minimum inheritance for all, a global tax on wealth, and a governmental role in influencing the direction of technological progress away from the kind that exacerbates inequality.

At the public policy level, Atkinson advocates: "a proper balance of power among stakeholders", which should incorporate an explicitly distributional dimension into competition policy; ensuring a legal framework that allows trade unions to represent workers on level terms; and establishing, where it doesn't already exist, a social and economic council involving the social partners and other non-governmental bodies to frame overarching policy.

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However, despite this endless stream of ideas – much of it from some of the world's most renowned and respected thinkers – is it really possible to reverse inequality, or it is simply unstoppable?

A bleak and sobering answer to this question is contained in a remarkable new and ambitious book by history professor Professor Walter Scheidel from Stanford University, The Great Leveller: Violence and the History of Inequality from the Stone Age to the Twenty-First Century. In a sweeping survey on inequality from the earliest societies, the lesson Schiedel extracts is that we can have peace and stability along with inevitable equality, or we can have that inequality disrupted only by carnage, bloodshed and disaster.

For thousands of years, he writes, civilisation did not lend itself to peaceful equalisation, a state of affairs as true for Pharaonic Egypt as it was of Victorian England, as true of the Roman Empire as for the United States.

"Throughout recorded history, the most powerful levelling invariably resulted from the most powerful aftershocks. Four different kinds of violent ruptures have flattened inequality: mass mobilisation warfare, transformative revolution, state failure and lethal pandemics" – dubbed by Schiedel "the four horsemen of levelling".

The so-called great compression of the early to mid-20th century had more to do with two World Wars and transformative revolution than any enlightened social policy. The two World Wars – which accounted for deaths on a historically unprecedented scale – "were among the greatest levellers in history," he writes.


We need to be careful what we wish for.

Dr Norman Abjorensen is a visiting fellow at the ANU's Crawford School of Public Policy.

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