Affluence grows, poverty shrinks

The Age‘s take on yesterday’s ABS Household Income and Income Distribution 2005-06 was predictable: ‘Rich are richer, while the have-less struggle’ read its headline. Yet what was more interesting was how little impact on overall inequality the growing number of high-income households is having.

Since 1994-95 the number of households in Australia has increased by 21%. But the number of those households with gross household incomes exceeding $3,000 a week, after adjusting for inflation, is up by 172%. The proportion of households in this group has gone from 2.6% to 5.9% (though the earlier figure will be understated somewhat, as salary sacrifices are now included).

Yet the Gini coefficient is not changing much. It is a measure of inequality, where 0 would indicate every household has the same income and 1 would indicate a single household has all the income. Over the 1994-95 to 2005-06 time period the Gini coefficient has only gone from 0.302 to 0.307.

One reason is that the number of poor households, with weekly incomes below $400, is dropping. In 1994-95, 24.3% of households were in this group. By 2005-06 it was down to 15.8% (though as the explanatory notes rather indirectly suggest, the self-reported income of these groups may not be accurate; for example their spending is much higher than their income. 15% of households in the bottom quintile give as their principal source of income ‘own unincorporated business’, ie the realm of under-reported cash-in-hand transactions.)

Another reason for the stable Gini co-efficient is that the Prime Minister is something of a conservative social democrat. Despite the proportion of households principally reliant on government pensions and benefits dropping from 28.5% in 1994-95 and 28% when Howard come to power in 1996 to 26.1% in 2005-06, welfare spending per person is up by more than a quarter in real terms, while the top 25% of income earners pay larger shares of the tax bill, at least to 2004-05. The ABS does note that the Gini coefficient would have been .303 if 2003-04 tax rates had applied to 2005-06 incomes.

On my pet topic of family welfare, the 1994-95 data doesn’t let me do a direct comparison. But going back to 1999-2000 we can see how more families are being sucked into the social security system. In 1999-2000, 38.4% of couples with dependent children reported government pensions and allowances as nil or less than 1% of gross income. By 2005-06 that was down to 30.3%, despite the increase in real incomes across all income groups. But encouragingly the proportion of such families relying on government for 50% or more of their gross income dropped from 11.5% to 6.2%.

The Australian‘s take on this ABS report was, as usual, far more positive than the same story in the Fairfax press. ‘Howard is the wage slave’s best friend, figures reveal’ read its headline. The Age had worked hard to find the only possible negative for the government. Except for Clive Hamilton, who will be upset that people have more money to spend, there is good news here for virtually every ideological group: those on the right can be pleased that income is up and welfare dependency is trending down, while those on the left can be satisfied that the proportion of people who are reporting a low income is down and overall inequality is stable.

34 thoughts on “Affluence grows, poverty shrinks

  1. Hang on, how can welfare dependency be down on the basis of a 25% real increase in welfare spending? Where is the justification for this increase in spending in an economy of growing affluence?

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  2. Containing inequality is the obvious justification BH.
    Obviously if you don’t believe that matters, you won’t agree with it. But I’m comfy with it personally. Although I do note there are probably some households, particularly the wealthy in receipt of FTB ‘B’, who are recieving payments that I would consider a net negative for society.
    The tax etc changes of 2006-07 and 2007-08 (LITO tripled, 30c threshold raised 40% etc) may be better for inequality than the ones between 2003 and 2005. But I guess we should wait for the numbers.

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  3. Brendan – The welfare figure I cited includes welfare services that would not be captured in these income-only statistics. Leopold is right that FTB would be a large part of what is going on, plus baby bonus is also in the income and spending statistics, which would have added $3,000 to the annual incomes of quarter of a million households, most of which were not poor. Another factor is that the single biggest item in the Budget, the old-age pension, is indexed at AWE which means real increases. Basically, I think the story is that while a slightly smaller percentage of the population is now largely reliant on welfare, many of those who are (the elderly) have received real increases and more family households than in the past are on welfare, though they get less than 50% of their income from it.

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  4. I’m never very convinced by the gini coefficient. I’d love to see the actual number versus perceived reality. As far as I’m concerned, the main group that you don’t want to be in is really the last little bit of the wages tail (not for any great amount of time, anyway), and thats basically a discrete group (long-term unemployed etc.). When I look at it this way, I’d much rather be poor in places like HK (high Gini) than France (low Gini), since at least I could get a job somewhere. It also fails to take into account many government policies (living in a Banlieu versus a harmless public housing estate) and social conditions too (crime rates).

    I think that some number reporting at least the extremeness of the left tail of the distirbution would be much more meaningful than the Gini number.

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  5. Brendan- you seem to have the cart before the horse..

    The more affluent the society the more it can spend on welfare, the longer its citizens live. Compare the US and Scandinavia.
    Scandinavia is richer, with a higher proportional welfare spend and longer lifespans. Same goes for Holland and the Melkweg.
    Mind you life is not too rosy in the multicultural project estate suburbs of Malmo where the welfare spend is very high.

    And Brendan dont listen to Norton he claims to be a libertarian but has made a career out saddling people with complicated lifelong tax burdens (and the associated tax code for Terje’s reading pleasure) in return for what does not really pass as education. He needs to get out and live in the world more, not just hang out in France with potbelly economists for a few days.

    I mean I attended the same university as AN and I attended the best boys school in Australia academically but when I was reviewed over here in the UK about 10 years ago they wrote “not very well educated”.

    You wouldn’t read about it.

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  6. I agree, Andrew, that there is good news for virtually every ideological group. I also agree that inequality has not increased appreciably (if one set the baseline at 1995-6 – the last year of Labor – the movement in the GINI and other indicators is a little more pronounced but hardly dramatic).

    I believe the Howard Government has not been doing enough to equalise education, housing, health and locational opportunities (as opposed to relieving the pain of poverty) and I am concerned at the very high level of wealth (and power) concentration in Australia (which appears to be increasing in recent years, with the richest 1/5 increasing their net assets by $300,000 in the past two years to $14 m and the bottom 1/5 increasing by $4000 to $23,000).

    But let’s not be grumpy. It could have been much worse.

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  7. Correction. The statistics on wealth should have read as follows. In the last two years, the richest 1/5 increased their net assets by $300,000 to 1. 7m. per household and the bottom quintile increased by $4000 to $27,000 per household.

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  8. I like Conrad’s point, we really need to find strategies that get people out of the basement and the kind of strategies that impact on the gini are quite likely not the ones that are required.

    We really need the Fred Argy’s of the world to get personally involved with the disadvantaged to find out what they need on a case by case basis instead of trying to do it by political activity to get more of other people’s money thrown at statistical inequalities.

    If you are going to throw money, spare a thought for the carers who give up so much of their lives to look after dependent relatives.

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  9. I like conrad’s assessment too. Being poor in a rich country with high inequality does mean more employment prospects and more avenues out of poverty into upward socio-economic mobility. Being poor in rich country with low inequality means people don’t have spare disposable income to create employment, even it is only domestic employment. This is demonstratively obvious when you look at the people prepared to migrate to countries like the US and Britain, where inequality is higher. Scandinavia doesn’t have a problem with immigration because hardly anyone wants to migrate there, despite the social welfare outcomes their socialist governments have pulled off. Being a cleaner in Stockholm where if your kids do well and get an education and work hard to get a better job that only promotes you up the socio-economic ladder a few steps, isn’t as motivating as getting a similar job in the US where if your kids do well they could be millionaires.

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  10. Alas, Rafe, at 76 and with much less energy than most, I am destined to remain an armchair policy thinker. But others are out there getting their hands dirty and one can learn a lot from them. And it is obvious that the disadvantaged do not need more welfare; they need more opportunities.

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  11. The presumption that low inequality and low social mobility are necessarily correlated requires a bit more evidence than just saying ‘France, Sweden, France’ very fast.
    And BH – your story that there are no millionaires and/or no prospect of becoming one in Scandinavia made me giggle. Have you considered the possibility that a) the US is right next to a gaggle of 3rd-world countries, b) Scandinavia is freezing cold might have something to do with the differing immigration levels?
    Germany and the other countries which share borders with the ‘second world’ in Eastern Europe have had plenty of immigration issues in recent years. Bit harder to reach Scandinavia.

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  12. PS – I believe Business Week reported some years back that social mobility in the US has fallen drastically in the last few decades – right in line with a substantial widening of inequality.

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  13. Leopold – the US has increased the gap you need to jump from poor to rich as their middle class has slowly disappeared. That hasn’t happened in Australia, I’d like to think because while the conservatives here pay lip service to small government, less taxation and less welfare, they never implement them (thankfully).

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  14. Leopold is certainly right. Upward income mobility and income inequality are both lower in the USA than in most Scandinavian countries and countries like Netherlands. And among males, income mobility is falling, not rising.

    International studies have found that freeing up markets generally enhances income mobility but that this alone will not produce the best results. A second, even more important ingredient for success is a relatively high level of social investment – in public education, health care, housing, transport infrastructure, employment programs, parental support services and so on.

    Freer markets help create more economic opportunities – but without adequate and well targeted social investment, it will be those born to rich, well-educated and motivated parents who will be best able to take up the opportunities.

    The US experience illustrates this well: it has the freest and most productive economy in the world but because of its relatively low rates of social investment, it does not rate well on social mobility relative to, say, the Nordic countries.

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  15. Fred says:

    “The statistics on wealth should have read as follows. In the last two years, the richest 1/5 increased their net assets by $300,000 to 1. 7m. per household and the bottom quintile increased by $4000 to $27,000 per household. ”

    Welcome to a booming stock market, Fred, where if you were smart enough to buy BHP at 9 bucks you could have turfed them out at 39.80 a few years later.

    Maybe the tax free threashold should be raised much higher so the bottom rung can also participate in these wonderfully booming conditions.

    But I also think you are conflating two different sets of issues here, Fred. the bottom rung is far more income dependent than the top layers and the wealth creation has been a capital appreciation story.

    What this shows is that we must find ways of cutting taxes down to zero at the lower scales to allow the bottom to create wealth. However we must also be mindful that there will always be a bottom rung. Not everyone is as rich and the wealthiest person living on Park Ave., Fred.

    ————————-

    Parkos

    Clearly the Brits got that worng , as you’re th most savvy well educated person on this blog and that’s saying something. With my gentleman b and c’s degree I feel humbled being around here.

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  16. Fred

    Public education will do nothing if its is set up as a command annd control system. It will only produce more graduates who end up not being able to find jobs. Think Meja studies as a case in point.

    Living standards can only rise if we create a better capital/labor ratio. It will do nothing if we graduate more lawyers. A good pointer to this is the large wages guys are getting out in the mining towns. Tradesmen are pulling in 150K.

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  17. Fred

    When talking about the US, we also need to take into account that there are 12 million illegals placing a great of pressure on low skilled wages.

    There are approx. 100 million working Americans.

    The bottom quintile is 20 million. So you can see what effect those 12 million have on the bottom level. In fact it is a testament to the US that it could actually accomodate these people with livelihoods.

    I keep reminding you that you need to compare like with like. It’s inaccurate to be comparing a large regionalized country such as the US with small nations like the Nordics.

    If you wish to do the comparison accurately.. compare New York to stockholm the two largest cities or compare CT to Sweden. CT’s income per cap PPP is $us 57,000 while Sweden’s is $29,000. I have told you before that Sweden compares to the poorest regions in the US in terms of per cap wealth and you have failed to come back on this. I think it’s about time you re-thought your Nordic solution.

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  18. “Upward income mobility and income inequality are both lower in the USA than in most Scandinavian countries and countries like Netherlands”.
    I’m not sure about the Netherlands, but I could point to France, Spain, Germany, Belgum and fair chunk of the rest of Europe, and note that they don’t follow the Scandavian pattern, especially those at the real bottom.
    I also think that people here are confounding income inequality with being poor (which is one reason I don’t like the coefficient). As far as I’m concerned, if my bottom 5% has absolutley no hope of getting anywhere (like a fair few European countries — my main experience is with France), this is far worse than, say, the next 20% having poor social mobility — its not like people are starving on minimum wages in Australia (let alone minimum plus a few hundred dollars, still conisdered “poor” in Australia).
    I might also point out here that when we think of social mobility amongst this latter low income group, we often blame the government for this and think governments can fix it via spending. However, a fair chunk of this is cultural in many places. JC points this out about the US and poor immigrants, with the opposite being true of Australia. Perhaps most immigrant groups in Australia have had historically high social mobility even though they often started off with nothing (and despite the local population showing much lower levels). Similary, on the flip-side, a lot of the programs designed to enhance social mobility of the local population are not exactly successful. The drop-out rate for apprenticeships in Australia is around 60% if I remember correctly, even though these programs essentially guarantee you your middle-class status for life, which shows you how much you can offer people that they still won’t take. In addition, despite the media complaints, my feeling (which is based on quantitative cross-country data) is that the public education system here is pretty reasonable (not neccesarily as good private education, but still good), as is health care — what percentage of young people are not reaching their full because they are too sick or because they don’t have a school to go to? The same is true of housing — even poor quality housing in Australia is better than most places (just go and live in Asia if you don’t believe that).
    Given these sorts factors it is not at clear to me what else the government could do in terms of spending to change social mobility levels. If it piled money into health, the high-school system, or housing, is anyone saying that this low-income but not poor group would really be a whole lot better off?(althernatively, I think that providing housing, basic literacy courses etc. for the bottom 5% would help a reasonable proportion of them, and would probably be a good investment as it would trade off with crime etc. This wouldn’t do much to the gini coefficient, as it would simply move them from nothing to poor)

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  19. As JC pointed out, public education is part of the problem, not part of the solution.

    The Scandanavian countries did not have to endure the New Deal that arrersted economic growth in the US for most of the 1930s, nor the Great Society programs of the 1970s that destroyed black families and created a new underclass.

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  20. Yes Rafe:

    The Economist ran with what I thought was a great special section of education some years ago.

    They asked what was the difference between the US higher Ed system and the rest of the world. Contained in that was the fact that the US has the key to the best tertiray ed sector in the world with a good proportion of the 50 intits. being in the US.

    In short, everyone else had an ed policy/ programs etc. and the US didn’t. There is no substantial higher ed Policy in the US.

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  21. Here I am coming in late to the conversation as usual, but I’ve just been having a look at the relevant ABS publication.

    I think Table 12 – Selected life cycle groups is quite revealing, especially in light of some of the conversations we’ve had on this site in relation to government largesse towards families with children.

    While families with both dependent and non-dependent children (the most mature families with children) have the highest gross weekly income on average (about $2,400 mean and $2,200 median), this is largely because this household type has the most employed persons on average (3.0). Once you adjust for the number and age of people in the household, this family type does only slightly better than families with eldest child under the age of 5 (1.5 earners on average and gross incomes of $1,700 mean and $1,500 median) – the older famiies have median equivalised income of $662 a week, compared with median equivalised income of $623 a week, for the “starting out” families.

    Not surprisingly, the most affluent lifecycle household was younger (under 35) couples without children – median incomes of $1550 gross and $830 equivalised.

    For single people, living arrangements were an important factor – younger single person households had a median equivalised income of $616 a week (not that far behind the couples with the youngest children, and better off than families with an eldest dependent child aged between 5 and 24), but group households were not all that far behind young childless couples with median equivalised income of $722 a week (better off than all the family types with children living at home).

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  22. BG – A lot of group households would be socioeconomically the same as young childless couples, except that they are not sharing beds.

    There’s no evidence here that the ‘working families’ we hear so much about are as a group doing it tough, especially once we factor in the non-cash benefits not included in this report.

    Single parents are doing better than in the past, but their high level of reliance on welfare (half the sample) means that their average incomes are still relatively low.

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  23. Andrew – I agree about the group households, the main difference being that they have slightly fewer earners on average (1.7 compared with 1.9 for the couples), and possibly more part-time workers.

    The numbers I was quoting are of course for the ‘average’ family in each type, so it doesn’t really tell you anything about the ones who are doing it tough. But I can’t help thinking that it is the number of earners that is the key in many ways, as well as the intensity of employment (ie full-time or part-time).

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  24. BG – There are datacubes on the ABS website that allow you to do more detailed analysis of where household types sit in the income distribution. Couples with kids are ‘over-represented’ in the middle three quintiles, and ‘under-represented’ in the bottom and top quintiles. Lone person households are under-represented in all quintiles except the bottom one, where they are massively over-represented. But that will be due in significant part to elderly widows and widowers.

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  25. The US has one immediate neighbour that is a developing neighbour, but much of the non-Hispanic immigrants come from South and East Asia, Africa and Eastern Europe. Getting to Stockholm from Bangalore would be just as easy as getting to Silicon Valley, but guess where the Indian migrants are going and the Nigerian taxi drivers?

    People are choosing with their feet where they think they have the most opportunity, and it is places like th United States that is overwhelming the first choice destination for the world’s poor. Must suck for all the America haters that if you asked an Iraqi or an Afghani if there was any place they’d rather live, they’d probably still answer America.

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  26. Brendan

    They would choose the US in a flash and how could one blame them?

    Imagine life in Sweden! Getting your pay check twice a month and seeing 62% lopped off the top. No wonder they have a high suicide rate! That would send the sane over the top. I would have choked down a few pills by now too with that sort of tax rate and having a 24 hour winter.

    Want to suicide? Go work in Sweden in the winter.

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  27. I was out drinking with a bunch of Swedes in London over the weekend. They actually though that paying £3.50 (AU$8) a pint is cheap. Poor bastards.
    I feel sorry for all the America haters. How can you visit places like Las Vegas, San Francisco, New York and think anything but “F*^$ me, this is what humans were destined to live like, wow!”.

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  28. Brendan –
    Chacun a son gout. You couldn’t pay me enough to live in NY or (especially) Las Vegas.

    Of course a sizeable increase in top incomes isn’t going to shift the Gini much – one of the mathematical properties of that measure is that it is pretty insensitive to movements at the extremes of the distribution. It’s one of a number of such properties that lead lots of income distribution specialists prefer other measures (the biggest one, though, is its lack of linearity and hence additive decomposability).

    On the big picture, though, its hard to deny these are salad days for most Australians.

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  29. Last week in booming Warsaw, where you can still get 6 cans of formaldehyde lager for a pound from a supermarket, I had one Swedish brunette on each arm, one a vegan model, the other a belly dancer. You can keep 90% of my paycheck and ban me from the US and its flabby waistlines for life if you like. It was a hot morning when we woke up.. I will leave it there given the comments policy..

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  30. He’s certainly a legend, isn’t he, Ragat?

    Parkos shouldn’t leave people in suspense though. I’m sure Andrew would make an exception this time.

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