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

Reasons for inequality (include statistics to show inequality)

• Ownership of factors of production (quantity and quality)•Occupation type•Gender •Age•Ethnicity•Family Structure•Location

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?