Inequality and disadvantage

Geoff Gilfillan, Statistics and Mapping

Key issue
Income inequality fell slightly between 2007–08 and 2015–16. Wealth tends to be much less equally distributed than income.
The proportion of the Australian population living below the relative income poverty line fell from 12.6 per cent in 2001 to 9.4 per cent in 2016.
Around 5 per cent of Australians were deeply socially excluded in each year between 2006 and 2015.

Various data sources show income and wealth inequality exists in Australia, but there is less agreement among analysts about whether inequality is worsening, improving or staying at around the same level over time. This article examines how income and wealth inequality is measured in Australia and the impact of the tax and transfer system in re-distributing income from wealthier to poorer households. Analysis is also provided of relative income poverty and broader measures of disadvantage.

Measures of household income

Household income consists of:

employee earnings
income from businesses
net investment income (interest, rent and dividends)
government pensions and allowances and
private transfers (superannuation, worker’s compensation, child support, income from annuities etc).

Equivalised disposable household income is used to enable more meaningful comparisons of income between different household types. It is defined as gross household income less tax that has been adjusted using a weighting process to account for household size and composition. (For example, children have a lower weighting in recognition that they require fewer resources than adults.)

Figure 1: equivalised disposable household income per week by percentile, 2007–08 and 2015–16

Equivalised disposable household income per week by percentile, 2007–08 and 2015–16

Source: Australian Bureau of Statistics (ABS), Household Income and Wealth, Australia, cat. no. 6523.0. Note: Data for the 95th percentile is customised ABS data.

Figure 1 shows the differences in income per week received by households at the top of each percentile (or tenth) of households in 2007–08 and 2015–16. For example, households in the top five per cent received $2,083 per week (after tax) in 2015–16, and those in the bottom ten percent received $436 per week. In other words, those in the top 5 per cent of households received almost five times as much income as those in the bottom ten per cent.

What is income inequality and how it is measured?

Income inequality is the extent to which income is unevenly distributed among households.

The Gini coefficient is the internationally accepted summary measure of inequality. Estimates for the Gini coefficient for equivalised disposable household income can range between zero (where all households have exactly the same income) and one (where one household has all the income). Values closer to zero represent higher income equality and values closer to one represent higher inequality.

Figure 2: Gini coefficient for equivalised disposable household equivalised income, 2007–08 to 2015–16

Gini coefficient for equivalised disposable household equivalised income, 2007–08 to 2015–16

Source: Australian Bureau of Statistics (ABS), Household Income and Wealth, Australia, 2015–16, cat. no. 6523.0.

Australian Bureau of Statistics (ABS) data shows the Gini coefficient in Australia fell from 0.34 in 2007–08 to 0.32 in 2015–16, which reveals a slight reduction in income inequality (Figure 2).

While the ABS has been producing estimates for the Gini coefficient since 1994–95 it cautions against comparing estimates from 2007–08 onwards with earlier estimates due to the improvements made to measuring income introduced in the 2007–08 cycle.

Stronger growth in incomes for those in the bottom 30 per cent of the household income distribution compared with the top 30 per cent since 2007–08 may have contributed to the reduction in inequality.

Figure 3 shows the growth (or decline) in income per week received by households in percentage terms between 2007–08 and 2015–16. It shows income growth was strongest for the bottom 10 per cent of households (up 14.7 per cent)—albeit from a relatively low base; and weakest (negative) for those in the top five per cent of households (down 0.9 per cent).

Figure 3: growth in equivalised disposable household income per week by percentile, 2007–08 to 2015–16

Growth in equivalised disposable household income per week by percentile, 2007–08 to 2015–16

Source: ABS, Household Income and Wealth, cat. no. 6523.0.

Another source of information on income inequality is data from the Household Income and Labour Dynamics in Australia (HILDA) survey. This longitudinal survey of 17,000 Australians has been undertaken since 2001. The data shows the Gini coefficient for household equalised income has been relatively stable over the 15 years to 2016, ranging between 0.29 and 0.31.

The HILDA Gini coefficient estimates for household equivalised income tend to be slightly lower than the ABS estimates. One of the reasons for the difference could be the broader definition of income used by the ABS. HILDA data indicates that income inequality has fallen slightly since 2011 (Figure 4).

Figure 4: Gini coefficient for equivalised disposable household income, HILDA data, 2001 to 2016

Gini coefficient for equivalised disposable household income, HILDA data, 2001 to 2016

Source: R Wilkins and I Lass, The Household, Income and Labour Dynamics in Australia Survey: Selected Findings from Waves 1 to 16, Melbourne Institute: Applied Economic & Social Research, University of Melbourne, 2018.

Household wealth or net worth

Household net worth or wealth is the stock of financial and non-financial assets held by households less their liabilities. Household assets can include:

accounts with financial institutions
superannuation balances held in accounts
shares and trusts
value of own businesses
outstanding loans made to persons or businesses
residential and non-residential properties and land
consumer durables that are used repeatedly and for more than one year, such as vehicles, household furniture and appliances, clothes and other personal items
art work and other collectibles and
intangible fixed assets such as intellectual property and computer software.

Liabilities of households usually take the form of loans outstanding that include mortgages; borrowing from other households; investment loans; credit card debt; and personal and study loans.

Figure 5 shows household wealth or net worth tends to be more unequally distributed than household income.

Figure 5: shares of equivalised disposable household income and household net worth by quintile, 2015–16

Shares of equivalised disposable household income and household net worth by quintile, 2015–16

Source: Measures of ABS, Household Income and Wealth, Australia, 2015–16, cat. no. 6523.0.

The lowest quintile (or bottom 20 per cent) of the household income distribution shown in the chart accounted for 7.7 per cent of total household income in 2015–16, but only 0.8 per cent of total household wealth. The highest quintile (or top 20 per cent) accounted for 39.8 per cent of total household income, and 62.5 per cent of total household wealth.

The Gini coefficient for household net worth or wealth is much higher (and hence much more unequally distributed) compared with the Gini coefficient for equivalised disposable household income. Figure 6 shows distribution of household net worth has become slightly more unequal over time.

Figure 6: Gini coefficients for equivalised disposable household income and net worth (or wealth), 2003–04 to 2015–16

Gini coefficients for equivalised disposable household income and net worth (or wealth), 2003–04 to 2015–16

Source: ABS, Household Income and Wealth, Australia, 2015–16, cat. no. 6523.0, Tables 1.1 and 2.1.

Note: Data is not available for 2007–08.

Household wealth has increased far more for those at the top of the household distribution compared with those at the bottom between 2009–10 and 2015–16 (Figure 7). The 95th percentile (or top 5 per cent of households) experienced growth of 16.2 per cent in household wealth in this period, while those in 10th percentile (or bottom 10 per cent) experienced a fall in wealth of 2.5 per cent.

The impact of the tax and transfer system on inequality

Australia has a highly targeted tax and transfer system, which results in the bottom of the household distribution having the highest shares of total equivalised benefits (social assistance benefits in cash and social transfers in kind) while paying the lowest shares of equivalised taxes on income and production.

Figure 7: increase in household wealth, 2009–10 to 2015–16

Increase in household wealth, 2009–10 to 2015–16

Source: ABS, Household Income and Wealth, Australia, 2015–16, cat. no. 6523.0, Table 2.1. Data for the 95th percentile is customised ABS data.

Social assistance benefits in cash include pensions and allowances received by aged, disabled, unemployed and sick persons; families and children; veterans or their survivors; and study allowances for students. Family tax benefits are also included. Social transfers in kind include the Medicare rebate; private health insurance rebate; and child care benefits and rebates.

Taxes on products are taxes payable on goods and services when they are produced, delivered, sold, transferred or otherwise disposed of by their producers (including GST and import duties). Government transfers are cash payments or non-tax concessions provided to individuals and families—such as income support allowances, family payments, supplementary payments (such as rent assistance), concession cards (that provide access to lower cost goods such as public transport and medicines), and housing assistance. Transfers are also provided through tax concessions. Government services such as health and education benefits and child care assistance are also defined as transfers and are more evenly spread across households.

Figure 8 shows how benefits and taxes are distributed among households. The lowest quintile (or bottom 20 per cent of the distribution) receives 37 per cent of all equivalised benefits but only accounted for 5 per cent of all equivalised taxes. In contrast, the highest quintile (or top 20 per cent) only receives 11 per cent of all equivalised benefits but accounted for exactly one half of all taxes paid.

Figure 8: shares of benefits and taxes by quintile, 2015–16

Shares of benefits and taxes by quintile, 2015–16

Source: ABS, Government Benefits, Taxes and Household Income, Australia, 2015–16, cat. no. 6537.0.

The effect of this redistribution is shown in Figure 9, which shows the shares of total equivalised private income (before benefits and taxes) and equivalised final income (after benefits and taxes are taken into account).

Figure 9: shares of private and final income by quintile, 2015–16

Shares of private and final income by quintile, 2015–16

Source: ABS, Government Benefits, Taxes and Household Income, Australia, 2015–16, cat. no. 6537.0.

Households in the lowest quintile only have a 3 per cent share of equivalised private income but a 13 per cent share of equivalised final income. Households in the highest quintile have a 35 per cent share of equivalised final income, which compares with their 47 per cent share of total equivalised private income.

The Productivity Commission has calculated that income tax and transfers reduce income inequality by approximately one third.

Relative income poverty

A person is defined as experiencing relative income poverty if they live in a household that receives less than 50 per cent of median household equivalised income (or less than half of the income received by the household in the mid-point of the household income distribution). This poverty threshold is also used by the OECD.

HILDA data shows the proportion of the Australian population living below this poverty line has fallen from 12.6 per cent in 2001 to 9.4 per cent in 2016.

A key factor influencing these fluctuations is that many welfare recipients in Australia have incomes quite close to 50 per cent of median household equivalised income, so that relatively small movements in government benefits and pensions (or the median) can bring about a change in the poverty rate.

The Productivity Commission used HILDA data to find that, between 2001 and 2016, 79 per cent of relative poverty spells experienced by survey respondents were for less than three years; 6 per cent lasted six years or more; and 1.5 per cent experienced an unbroken spell of ten years or more.

OECD data shows the top one per cent of households in Australia accounted for 15 per cent of total wealth in 2014, and the top 5 per cent accounted for just over one third. By way of comparison, the top one per cent of households in the US accounted for 38 per cent of total wealth in 2013, and the top5 per cent accounted for just under two thirds.

At 12.8 per cent in 2014, Australia’s relative income poverty rate was just above the OECD average of 11.5 per cent. By comparison, the US had a relative income poverty rate of 17.5 per cent. Finland (6.8 per cent) and Norway (7.8 per cent) had much lower relative income poverty rates.

Deep social exclusion

The Melbourne Institute of Applied Economic and Social Research in collaboration with the Brotherhood of St Laurence developed measures for social exclusion. Social exclusion can result from:

lack of material resources (usually measured by low income, low net worth, low consumption and financial hardship)
poor labour market outcomes (measured by living in a jobless household, individual unemployment, long-term unemployment, under-employment or marginal attachment to the labour force)
low education and skills (measured by low formal education, poor literacy skills, poor English and little employment experience)
poor health or disability (measured by poor physical or mental health, having a long-term health condition or disability, or living in a household with a child that has a disability)
lack of social connections (indicated by little social support or rare engagement in social activities)
poor community connections (exacerbated by living in a neighbourhood that is not active or connected; and lack of involvement with a club, association or volunteer work) and
concerns about personal safety (potential or actual victims of violence or property crime, holding concerns about exposure to risk in their neighbourhood).

Deep social exclusion occurs when individuals experience multiple forms of exclusion. The Productivity Commission found Indigenous Australians, people with a long-term health condition or disability and public housing tenants are the groups most likely to experience deep social exclusion. Around 5 per cent of the Australian population experienced deep social exclusion each year from 2006 to 2015, while 2 per cent experienced persistent deep social exclusion for five years or more.