Income Inequality Essay

The inequality of distribution and wealth can be measured from two perspectives – the inequality between the rich and poor, and the growing inequality between wages and profits. Through looking at these two relationships we can see the worsening condition of the distribution of income and wealth in Australia. When looking at changes in income in Australia, the recent trends (as seen in diagram 1 and diagram 2) shows the top 20% or highest quintile, increasing their income share from an averaged 38% in 1994/95 to over 41% in 2007/08.

This increase has resulted from the long period of economic growth, characterised by increasing wages and higher returns on investments from rising interest rates. However, the diagram shows this increase in income share resulted at the expense of the lower quintiles, especially the first and second, whose average dropped from 8% in 1994/95 to just 6% in 2007/08. Diagram 1 Diagram 2 A significant measure of the changes in equality of Australia’s income is the Lorenz curve, which demonstrates the current state of inequality, compared to the perfect state of equality.

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Diagram 3 As seen in diagram 3, the increased bowed affect of the line, away from the perfect cumulative income, illustrates the worsening equality of Australia’s income, throughout all sources of income – wages, rent, earning, profits and social welfare payments. In addition, the Gini coefficient, “which directly relates to the graphical depiction of inequality provided by the Lorenz Curve” , shows Australia rising from 0. 307 in 1995/96 to 0. 345 in 2007/08. This large increase in the Gini coefficient of around 0. 25 to over 0. 0 was a result of the 1991 recession, in which “long-term unemployment became entrenched and underemployment rose sharply”, causing long lasting inequality in the income and wealth distribution. Wealth however, is a much harder measurement to observe than income, due to the private nature of individuals assets. But, despite replying only on occasional surveys by researchers, the results all show high levels of inequality in Australia’s distribution. The richest ten per cent of households are typically reported to own close to 45 per cent of all wealth owned by households.

Conversely, the bottom three deciles have no wealth at all and often shows negative wealth, where their debts exceed their assets. This evidence is seen in the Gini coefficient for household net worth, which was at 0. 61 in 2001/02. Nevertheless, the inequality of wealth distribution in Australia “has remained relatively stable in recent decades” and is not as severe as income inequality. This can be mainly attributed to the forced savings of the labor force, known as superannuation. Superannuation ensures that most Australians obtain some level of wealth, which allows for a more equal distribution.

Still, inequality occurs due to higher income earning employees – those in the top two quintiles – having greater levels of superannuation, especially due to the progressive tax system and its tax free loopholes. Therefore, despite Australia’s repute of an egalitarian society, it is in fact “one of the least equal societies” . The recent trends and changes in the distribution of income and wealth has shown a worsening and “If people’s perception of their happiness is judged according to what they have relative to others, then economic inequality is a recipe for widespread and permanent social discontent”

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