7.4 The reasons why the distribution of income and wealth is an important issue

To monitor trends, every couple of years the ABS estimates the distribution of Australia’s wealth by quintile, or as it is called, net worth. It uses the same approach as that for the distribution of income. Net worth refers to the difference in value between an individual’s assets owned, minus any debt or liabilities. There is positive net worth when there is an excess of assets owned by households over their liabilities, but negative when the values of liabilities exceed assets.

Figure 7.12 includes two graphs about the distribution of Australia’s wealth: • Graph 1 shows the average value of wealth (A$) owned by each quintile and by other groupings. Notice that quintile 1 has negative average wealth of $5000, while quintile 5 has positive wealth averaging around $3 255 000, and that the wealthiest 5 per cent of the population owns an average of $6 795 000 in assets. • Graph 2 involves a Lorenz diagram based on net worth by quintile. You may notice here that the Lorenz curve for wealth deviates much further from the diagonal line of total equality than the curve for disposable income. Again, this demonstrates that Australia’s wealth is divided even more unevenly. Indeed, the Gini coefficient for wealth is 0.621, whereas that for equivalised disposable income is just 0.328. In our country, the wealthiest 20 per cent own more than 63 per cent of all wealth. However, while you might think that this seems highly unequal, globally the richest 1 per cent are estimated to own around half of the world’s wealth! Surprisingly, a net worth or assets equal to around $100 000 would put an individual in the top 10 per cent of the world’s wealthiest. By comparison, it is estimated that the wealthiest 1 per cent of Australian households own around 23 per cent of our total wealth, or more than the lowest 70 per cent of all Australians. 7.3.3 Measures of Australian poverty Poverty means different things to different people. • Absolute poverty: When most of us think of poverty we think of absolute poverty where there is serious material deprivation and the absence of the real necessities to sustain life. This is commonly found in Third World nations and in some remote Indigenous communities in Australia. • Relative poverty: When measuring the type of poverty most commonly found in Australia, it is relative poverty. This is where people’s material living standards are low or austere relative, compared with the rest of the community. • Multi-dimensional poverty: Poverty can be more than just a lack of income. It is possible to have a reasonable income, but despite this there is no access to clean drinking water, sanitation, power, opportunity, and basic education. This is called multi-dimensional poverty. In the 1960s, economist, Professor Ronald Henderson, developed a controversial measure called Australia’s poverty line. In a sense, this measures relative poverty. The poverty line was set at the amount of money required by different-sized income units each week to sustain an austere or very basic living standard (i.e. to purchase essential food, shelter and clothing). This is normally set at 50 per cent of median Australian incomes. For September 2021, for example, the Melbourne Institute for Applied Economic and Social Research estimated that a standard income unit of four (consisting of two parents, one working, plus two dependent children) would need over $1,034.85 per week (including housing) to stay above the standard poverty line. The Australian Council of Social Service (ACOSS) and the University of NSW use poverty lines to estimate poverty rates, some of which are shown in figure 7.13: • Graph 1 indicates that Australia has a surprisingly high overall poverty rate of 13.6 per cent of the population (including children). This means that a large proportion of the population cannot enjoy even austere living standards. Notice that there are two different years (pre-2007 and post-2007) of income data used here for calculating comparable poverty rates. UNCORRECTED PAGE PROOFS • Graph 2 shows Australian poverty rates among selected groups of individuals. Notice that rates are highest among the unemployed, some Indigenous communities, women, welfare recipients, and the disabled.

8 000 000

7 000 000 Value of wealth owned by quintile or other group - Australia (A$)

6 795 000

6 000 000

Value of assets (A$) –1 000 000 Lowest 5% Individual wealth quintile or other group

-5000 565 000

8000 36 000 231 000 1 042 000 3 255 000

5 000 000 4 754 000 4 000 000 3 000 000 2 000 000 1 000 000 0 Lowest 10% Lowest 20% Second 20% Middle 20% Fourth 20% Highest 20% Highest 10% Highest 5% 0.7 5.2 16.3 36.7 100 0 20 40 60 80 100 0 Cumulative quintile 0 (0%) Cumulative quintile 1 (20%) Cumulative quintile 2 (40%) Cumulative quintile 3 (60%) Cumulative quintile 4 (80%)

Cumulative share of total wealth (%) 20 40 60 80 100 Cumulative quintile 5 (100%)

Australia’s Lorenz curve showing the distribution of wealth This area determines the Gini coefficient for wealth = 0.621 Sources: Data for graph 1 was originally derived from ABS, Household income and wealth, https://www.abs.gov.au/statistics/econo my/finance/household-income-and-wealth-australia. Graph 2 is derived from ABS, Household income and wealth, https://www.abs.g ov.au/statistics/economy/finance/household-income-and-wealth-australia. 0 UNCORRECTED PAGE PROOFS

20%

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1999–00 2000–01 2002–03 2003–04 2005–06 2007–08 2009–10 2011–12 2013–14 2015–16 2017–18 50% poverty line (pre 2007 measure) 50% poverty line (post 2007 measure) Poverty rate amongst the unemployed 0 10 20 30 40 50 60 70

78 54 53 53 52 38.3 37 31.4 29.6 17.7 13.9 13.6 80 90 Poverty rate in very remote Indigenous areas Poverty rate amongst women and children Poverty rate amongst government welfare recipients (main… Poverty rate amongst those renting property Poverty rate in remote Indigenous areas Poverty rate amongst people with a disability Poverty rate overall amongst Indigenous poverty rate Poverty rate amongst amongst those born in non-Englissh… Poverty rate amongst childen aged under 15 Poverty rate amongst people aged 15–25 Poverty rate amongst all Australians Percentage of group on incomes below the poverty line (set at 50% of median income) Percentage of group below the poverty line Note: The poverty line used is 50% of median income, taking account of housing costs. The lower line shows poverty rates measured using the pre-2007 income definition, while the higher line is based on the post-2007 income definition. Sources: Graph 1 is copied directly from ACOSS & UNSW, Poverty report, 2020, Figure 2, P9, https://povertyandinequality.acoss .org.au/wp-content/uploads/2020/02/Poverty-in-Australia-2020_Part-1_Overview.pdf; Graph 2 has data derived from ACOSS and UNSW, Poverty in Australia, 2018, see ACOSS_Poverty-in-Australia-Report_Web-Final.pdf Resourceseses Resources Weblinks Inequality in Australia: A nation divided UNCORRECTED PAGE PROOFS Inequality in Australia Wealth inequality in America Global wealth inequality Gini coefficient calculator 16 Jacaranda Key Concepts in VCE Economics Units 1 & 2 Twelfth Edition

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7.3 Exercise 7.3 Quick quiz 7.3 Exercise 1. Explain what is meant by the distribution of income. (2 marks) 2. Outline the extent of income inequality in Australia. (2 marks) 3. Outline how the distribution of income is measured by the ABS. (2 marks) 4. Concerning the Lorenz diagram, explain the following: a. the distribution of income by quintile b. the line of total equality c. the Lorenz curve d. the Gini coefficient. 5. Explain what is meant by the distribution of wealth (net worth). (2 marks) 6. Explain the term, relative poverty and how it is commonly measured in Australia. (2 marks) 7. a. Explain how a nation’s pattern of income distribution is likely to affect material living standards. (2 marks) b. Explain the difference between market or private income and equivalised disposable income. (2 marks) c. Explain the steps whereby the ABS measures the distribution of income. (4 marks) d. Examine the statistics shown in table 7.1 relating to Australia’s distribution of equivalised disposable income and wealth (net worth) by individual quintile and cumulative quintile. TABLE 7.1 The distribution of Australia’s equivalised disposable income and wealth by quintile (percentage) Quintile Quintile 1 Quintile 2 Quintile 3 Quintile 4 Quintile 5 Disposable income share by individual quintile, 2017–18 7.5 12.5 17.0 22.7 40.4 Disposable income share by cumulative quintile, 2017–18 7.5 20.0 37.0 59.7 100.0 Net wealth share by individual quintile, 2017–18 0.7 4.5 11.1 20.4 63.4 Net wealth share by cumulative quintile, 2017–18 0.7 5.2 16.3 36.7 100.0 Source: Data derived from ABS 6523.0 (Tables 1.1 and 2.1), 2017–18. Use the data to draw and fully label a Lorenz diagram that shows the following (on graph paper or using Excel and your computer): (3 marks) • fully labelled axes and scales • the line of absolute equality in income and wealth distribution • the line of absolute inequality in income and wealth distribution • the two Lorenz curves — one for the distribution of equivalised disposable income and one for net worth or wealth for Australia (Note: Use the cumulative quintile data for drawing these curves.) UNCORRECTED PAGE PROOFS e. Quoting statistics from table 7.1 and your Lorenz diagram for different quintiles, describe the patterns of Australia’s distribution of: i. equivalised disposable income (2 marks) ii. net worth or wealth. (2 marks)

f. Using the Lorenz graph you have just created, try to estimate the Gini coefficient for the distribution of Australia’s equivalised disposable income and one for net worth or wealth. For each, the number will be one between 0 and 1. This can be done roughly by expressing the area between the diagonal and the curve as a proportion of the total triangular area for the lower part of the Lorenz diagram. (2 marks) g. Distinguish between absolute poverty and relative poverty. (2 marks) h. Explain what is meant by the poverty line. Identify which groups of Australians are most likely to live in poverty. (3 marks) i. Examine figure 7.14 comparing poverty in different countries. Identify which OECD country has the highest rate of poverty, and which has the lowest, noting how Australia’s rate compares. (2 marks) FIGURE 7.14 Comparison of poverty rates in OECD nations including Australia (as percentage of the population) 20.5 17.8 16.9 15.9 15.7 14.2 12.4 12.4 12.1 11.6 11.5 9.8 9.3 9.2 8.5 6.5 6.1 4.95 10 Costa Rica USA IsraelMexico Japan Spain United KingdomAustraliaGreeceCanada RussiaGermanySwedenSwitzerlandFrance FinlandDenmarkIceland 15 20 25 Poverty rate (% population) Source: Data derived from OECD Data, Poverty Rates, see https://data.oecd.org/inequality/poverty-rate.htm. Fully worked solutions and sample responses are available in your digital formats. 7.4 The reasons why the distribution of income and wealth is an important issue KEY KNOWLEDGE • the reasons the issue is of importance to the economy at a local, national and international level Source: VCE Economics Study Design (2023–2027) extracts © VCAA; reproduced by permission. Collectively, the world’s wealthiest 1 per cent own almost half the world’s wealth, dramatically increasing since 0 UNCORRECTED PAGE PROOFS the COVID-19 pandemic. In Australia, the wealthiest 10 per cent of households own around 50 per cent of all wealth. As an economic issue, whether the distribution of income and wealth is relatively even or uneven matters a lot because it affects the general wellbeing of people, locally, nationally and globally. A relatively even distribution, for example, spreads purchasing power and consumption more broadly so that average wellbeing is enhanced. A relatively uneven distribution means that only a few get to enjoy reasonable living standards.

The main connections between distribution and living standards are summarised in figure 7.15. • It shows that income and wealth interact and affect each other. Together, they influence the levels and distribution of consumption per person. • In turn, consumption per person especially determines material living standards and the overall extent to which needs and wants can be satisfied. It may also impact some aspects of non-material wellbeing like happiness, health, relationships and social cohesion, crime rates and stress levels.

FIGURE 7.15 The important relationship between the distribution of income and wealth and living standards Together, the distribution of income and wealth determine per capita consumption. The nation’s income cake is distributed (either fairly evenly or unevenly) Consumption especially affects the extent to which material needs and wants can be satisfied, and perhaps some aspects of non-material living standards.The nation’s wealth cake is distributed (either fairly evenly or unevenly) As we shall see later in more detail, opinion is divided how much inequality is desirable: • Some argue that greater income inequality can stimulate economic growth and in the long-term make everyone better off, even the poor. The benefits for groups at the top eventually trickle down to those at the bottom. • Others argue the reverse that too much inequality actually shows the growth in output, incomes and wellbeing. • There is also the social cohesion argument that says that too much inequality can be destabilising leading to unrest and political instability. • Interestingly, a recent Essential Poll taken discovered that over 90% of Australians felt that, ’no one should go without basic essentials like food, healthcare, transport and power.’ 7.4.1 The importance and effects of poverty and inequality on material living standards locally and internationally Material living standards ultimately reflect an individual’s annual level of consumption and the extent to which needs and wants are satisfied. As mentioned, inequality in the distribution of income and wealth have a very direct effect on the material wellbeing of people in Australia and overseas. Figure 7.16 contains three graphs relating to aspects of inequality.UNCORRECTED PAGE PROOFS