Distribution of income and wealth

Distribution of income and wealth • Define income Market income= wages/salaries/profit/rent Gross income= market income + transfers Disposable income= gross – income tax • Define wealth • Why does inequality occur?

Measuring inequality • Lorenz curve (page 231) • Gini coefficient • Trends in income and wealth (page230/231)

Sources (list from page 232-233) Income Wealth

Ownership of factors of production (quantity and quality) Occupation type Gender Age Ethnicity Family Structure Location Reasons for inequality (include statistics to show inequality)

Reasons Wealth Inequality • Income inequality/savings • Inheritance • Property • Shares • Entrepreneurial ability

Costs of Inequality Social Costs • Poverty relative poverty v absolute poverty 12.2% of Australian live below poverty line (earn below 50% of median income) • Social divisions and social disorder

Costs of Inequality Economic Costs Increased cost of welfare to government Reduced consumption and total utility Reduced economic growth Increased conspicuous consumption by high income earners

Benefits of inequality Economic Benefits Incentive effect - Work harder Education Labour mobility increases Risk taking – entrepreneurs Increased savings and investment

Policies 1) Redistribution of income • Welfare payments- unemployment, family allowances, age pensions etc • Progressive income tax Refer to figure 11.17. Explain how government policies redistribute income in Australia- use statistics in your answer.

Policies 2) Superannuation Compulsory superannuation has reduce wealth inequality. Employers will contribute 9% of employees wages to a superannuation fund. There are also tax incentives for self funded superannuation. 70% of the wealth for low income earners is from super.

Policies 2) Economic Growth Sustainable economic growth over the last 20 years has reduced unemployment and increased real wages. Employment growth has reduced poverty but the problem of long- term structural unemployment remains.

Negative consequences of other government policies Income inequality has increased as a consequence of micro reform Tariffs- increased structural unemployment Enterprise agreements - favoured high income earners (it would be worse without safety net adjustments) GST- bigger impact on low income earners

Conclusion Overall the policies designed to reduce inequality tend to outweigh the negative consequences of microeconomic reform. Generally the degree of inequality in Australia has increased slightly over the last 7 years, however, living standards have Improved. What does this mean?

Distribution of income and wealth