Trends in the distribution of income in Australia

The paper examines the recent trends in Australia\u27s individual and household income distributions. It examines the proximate factors that help explain aggregate trends to provide a more detailed understanding of the composition of the income distribution (in terms of both the groups represented within it and the different kinds of income they receive). It also examines whether the Australian experience mirrors general trends across OECD countries. Key findings: Between 1988-89 and 2009-10, the incomes of individuals and households in Australia have risen substantially in real terms and in comparison to trends in other OECD countries, with particularly strong growth between 2003-04 and 2009-10. – The increase has mainly been driven by growth in labour force earnings, arising from employment growth, more hours worked (by part-time workers) and increased hourly wages. While real individual and household incomes have both risen across their distributions, increases have been uneven. – The rate of growth has been higher at the ‘top end’ of the distributions than the ‘bottom end’. – Incomes for those in the middle of the distribution have spread out (that is, they have become less concentrated around the average). These changes underlie the recently observed increases in summary measures of inequality (such as the Gini Coefficient) in Australia for individual and household incomes. – At the individual level, the key drivers are the widening dispersion of hourly wages of full-time employees and (to a lesser extent) the relatively stronger growth in part-time employment. – At the household level, the key driver has been capital income growth amongst higher income households. The impact of growing dispersion of hourly wages on the distribution of labour income has been offset by increased employment of household members including a decline in the share of jobless households. Final income is also influenced by government taxes and transfers. These have a substantial redistributive impact on the distribution of household income, substantially reducing measured inequality. Although the progressive impact of the tax and transfer system declined slightly from the early 2000s (with the introduction of the GST and a fall in the number of recipients of government benefit payments associated with higher employment), real growth in the value of direct and indirect transfers contributed to growth in incomes for low income households. The analysis highlights the need to examine the changes in various income components and population subgroups in order to understand the changes in the distribution of income and inequality measures such as the Gini coefficient. – Differences in individual income, and therefore household income levels, occur for a variety of reasons including personal choices and innate characteristics as well as opportunities and inheritances. These differences combine with broader economic forces and policy settings to influence the distribution of income over time