Distribution of Income and Wealth Essay

Economics Written report – distribution of income and wealth Introduction For several years, Australia has achieved steady economic growth, higher productivity growth, low inflation, and falling levels of unemployment. They have changed the structure of their economy which played an important role in creating a more efficient and competitive economy. One of the major challenges of the government policy was equal distribution of income and wealth between different groups in society.

Government should ensure that it doesn’t happen that only those who are financially well off are benefited from the economic prosperity, which can increase the degree of inequality in income and wealth and make the society divided. Australia has often been regarded as an egalitarian society in which the income and wealth are equally distributed. However, according to the statistics, Australia is one of the less equal societies in the industrialized world.

In 1990’s, the level of inequality in Australia’s income and distribution surpassed that of most OECD countries, and over the 2000’s, the inequality has been worsened because of a sustained reduction in the level of unemployment, the expansion of compulsory superannuation and government policies to redistribute income to lower income households. Part 1 The economic and social consequences of income inequality As the inequality in Australia’s income and wealth increases, not only are there disadvantages but there are also some advantages associated with it. Benefits of inequality It is argued that inequality is a natural consequence of the free market economy in which the individual income and wealth are decided according to their marginal productivity. As people know that they can make more money than other people does if they work harder in the free market economy, the inequality encourages them to work harder to change their position in the distribution of income. • Economic benefits of inequality. 1. nequality encourages the labor force to increase education and skill levels If the people who got the higher level of education and has better skills get more rewards, freshmen and existing participants in the labor force will make more effort to improve their level of education and skills. Unless those who get lower income can not afford to pay the fee for their education and training, the income inequality can be motive to improve the quality of the labor force. 2. Inequality encourages the labor force to work longer and harder.

The idea that if they work longer and harder, they can earn higher incomes, encourages the workers to work overtime and thus, it may promote the economic growth. However, they have to give up their leisure time in order to work longer hours when they need more money. 3. Inequality makes the labor force more mobile If one company offers more money to the worker who is already working in the other company, he or she will not refuse it unless there are big problems. Thus, the use of higher income encourages labor to move to where it is needed.

The more mobile the movement of labor force, the more efficient allocation of resources and a higher rate of economic growth. 4. Inequality encourages entrepreneurs to accept risks more readily If there are no more reward for risk-taking in operating a business, then no one is willing to be an entrepreneur. Because of the prospect of considerable income rewards, they take the risk associated with business, and as the number of people working increases, the productive capacity in the economy increases. 5.

Inequality creates the potential for higher savings and capital formation When an individual earns the higher income, he might be likely to save more money than other people might. However, in the case of lower income earners, vice versa. In theory, the greater the income inequality, the more increased savings in the economy because of the greater number of higher income earners. The increased savings reduce Australia’s reliance upon foreign capital by providing domestic funds for investment. • Social benefits of inequality Inequality may bring social benefits as well if it promotes a desirable social structure.

If individuals are more productive, they will earn more income. This encourages people to improve their productivity, resulting in benefits both to them as individuals and to the whole economy. ¦ The costs of inequality It is also argued that the system of free market capitalism just aggravate the difference between the incomes of rich and poor. • Economic costs of inequality 1. Inequality reduces overall utility Because the people on higher incomes gain less utility from an increase in income than the people on lower incomes, inequality in the distribution of income reduces the total utility, or satisfaction, in society.

As more of a good is consumes, it will provide progressively less utility to the consumer. For example, an extra $1 of income is worth more to a lower income earner than to a higher income earner. 2. Inequality can reduce economic growth A strategy of reducing income inequality can help to raise economic growth because low-income earners spend a higher proportion of their income. If the countries experience a higher level of inequality during the industrialization process, they would experience faster economic growth in the case that the benefits of their economic growth were more widely distributed. 3.

Inequality reduces consumption and investment Low income earners usually don’t spend more money than high income earners because they have not enough money to buy everything they want. Therefore if the level of income inequality is high, then the economic activities are inactive, which leads to lower employment, investment and living standards. ¦ Social costs of inequality • Social class division As the level of inequality goes up, the difference between higher income earners and lower income earners get bigger. Richer people get richer because they can get better education and acquire wealth through inheritance.

On the other hand, the lower income earners get poorer because they have less opportunity to pursue income and wealth goals. Therefore, they are divided into two classes. • Poverty Australia has a high level of relative poverty – many sections of the community have income levels and lifestyles that are not meeting the expectations they have as part of modern Australian society. Part 2 Recent trends in Australia’s distribution of income and wealth. Although the level of inequality in Australia has decreased recently, it still remains high compared with other industrialized nations.

Depending on their age, qualifications, gender, occupation, cultural background, family type and where they live in Australia, some people are more affected by inequality than others. • Age and education Income varies over the course of life. At the age of 25 to 59, the income is the highest because it is the main years of a person’s working life. Since people have less education and experience and gold lower paying or part time jobs, the income levels are low in the earlier years of working like. Also, when they get older, the income level goes down.

For education, not surprisingly, those who got higher qualifications such as tertiary degrees and diplomas enjoyed wealth levels that were much higher than those with vocational training or no qualifications beyond high school. • Gender and occupation Although a group of men and women have similar skills and experience, generally men receive higher income because of the discrimination. That problem is not being solved. In 2005-06, the average weekly earnings of women were only 65. 5 per cent of those of males. in 1990-91, the wage relativity was almost the same, at 65. percent. Also jobs that require higher levels of education, training and experience such as managerial positions and professional occupations enjoy higher income levels than those that do not. • Ethnic and cultural background Generally, those born overseas tend to receive higher weekly income levels than those born in Australia. However, for Australia’s most recent migrants, income distribution is strongly influenced by the length of time that migrants have been in Australia and the courtiers from which they have migrated.

For recent migrants from mainly English speaking countries such as the United Kingdom, New Zealand, the United States, Canada, Ireland and South Africa, income levels tend to be higher than for those born in Australia. On the other hand, for migrants from non-English speaking countries gave lower income levels than Australian born people. • Family structure Family structure is another important factor influencing trends in income inequality, particularly because of recent demographic changes in Australia, such as the growth of female participation in the workforce, and the increasing proportion of people living alone.

One person households and single parent households received weekly income levels significantly below the median of $491 per week. Single parent households, who have a weekly income 31percent below the average for all family structures, were the worst off. Couples without dependent children, which have a higher proportion of household members in paid work, were the highest income family structure and received $506 per person per week. • Geography

Regional factors are not only influencing demographic change – as people in disadvantaged areas takes flight to more prosperous areas- but they have also been a major issue driving the direction of government policies relating to income inequality. There is big inequality in income distribution between Australia’s states and territories, with the Australian Capital Territory enjoying the highest average weekly income of $1026 and Tasmania suffering the lowest income of $724 per week.