More people are better off, but inequality is rising - so what’s going on?

So are we better off? The answer is yes - sort of. AAP

After several decades of unprecedented growth, have the benefits trickled down to all Australians? The answer according, to a new study by the Productivity Commission, is a resounding “yes … probably, but it’s hard to say”.

It’s an honest assessment.

What the study does show is that: more people are working; they are working longer hours and; they are being paid more. But it also shows that there has been a slight increase in overall income inequality.

Why?

Consider the positive equalising forces first. More people are working in paid employment. In part this is due to the decline in the unemployment rate. This is just 5.5% now, compared to a peak of 12% in 1992. Because households in the lowest income groups had stronger employment growth, and because paid employment is by far the most important source of income, the reduction in the unemployment rate means significant increases in income to those who need it the most. As the Cambridge economist Joan Robinson said: “The misery of being exploited by capitalists is nothing compared to the misery of not being exploited at all”.

The other major source of employment has been an increase in participation of females in the labour force. In January 1988 less than 50% of females were in the labour market. That figure is now 58.8%.

On top of this wages have also risen right across the spectrum.

All this is good news. It shows that economic growth has delivered the benefits it should. It has created jobs, increased wages and allowed the government to offer more support programmes.

The net effect of all the change however, is a slight increase in overall inequality.

Some might be tempted to worry about this. After all, extreme inequality is the sign of a broken economy – just think of Namibia, South Africa or Haiti.

But as we have already seen the benefits of Australia’s boom have been widespread and the changes in inequality are small. Moreover, standard measures of inequality can increase as a result of demographic and social changes, rather than fundamental changes in the way the economy delivers the gains from growth.

For example if I choose to work part-time, I expect to receive a part-time salary. As the study shows, a large part of the rising inequality is in fact due to the increase in part-time workers. Because they earn less per week, this tends to reduce the average income of low income households. Statistical analyses then register this change as an increase in inequality.

So be it. But it reflects the fact that more females are choosing to work, rather stay at home, because they can, and because the wages are better than they used to be. This is a good thing, despite the fact that it causes measures of inequality to rise.

Likewise if I retire on a pension, I expect to receive a lower income. Comparing the income of a 65 year pensioner, who may own her home and have no debt, with a 30 something couple with a baby and a mortgage, is not comparing like with like. There is no reason why their incomes should be the same.

But, according to the PC study, much of the so-called “equalising” government payments involve transfers from high income high debt younger families, to sole household pensioners. It is far from obvious that reducing “inequality” from this sort of intergenerational transfer is a good thing, or that that we need more of it. Clearly, at the very least, it depends on how the transfers are targeted among age pensioners.

At a deeper level there is no agreed notion of what sort of market outcomes should be delivered by a society with equality of opportunity, but differences in attitudes, abilities, risk taking, studiousness and determination. So whether rising inequality is a good or bad thing depends on whether we have too little inequality or not enough to begin with. As a country, Australia appears to be pretty much in the middle of the OECD.

The takeaways from the study are, first, that trying to summarise all the nuanced changes in the labour market in a simple index of inequality is fraught with difficulty. Inequality is a multi-dimensional notion, and headline figures often gave a false impression of the how growth delivers economy-wide benefits. Against this background the PC’s analysis appears to be a careful and useful assessment of the many complex changes that have occurred in labour markets over the last two to three decades.

But the PC’s study also shows that there has been real growth in wages and employment so that the benefits of growth have been widely spread around. Amid the biggest minerals boom in Australia’s history, except perhaps the Victorian gold rush, it is easy to forget the scourge that unemployment once was. By creating more employment opportunities, and raising wages, growth has not just trickled down - it has poured out all over the floor.