LCC Working Paper Series: 2015-19

Authors

Arturo Martinez, Mark Western, Wojtek Tomaszewski and Tina Rampino

Non-technical Summary

Recent studies show that income inequality has been steadily increasing in many parts of the world. Indeed, inequality is considered one of the world’s biggest problems today because, especially when coupled with low mobility, it can perpetuate vicious cycles of disadvantage, with the poor having very low chances to improve their living standards. Fittingly, inequality has been elevated as a central theme of the post-2015 Sustainable Development Goals policy agenda.

However, inequality is not all bad. Social theorists have long argued that inequality is a natural feature of societies, and that it will never be possible, or even desirable, to achieve an absolute equality in a society. For instance, the meritocratic system that is widely aspired to in many societies departs from perfect equality due to the differential incentives given to people with varying levels of effort. This is an example of what is considered fair inequality. In contrast, unfair inequality refers to variations in socio-economic outcomes that are largely attributable to differences in circumstances or factors that people do not have control of, such as parental background, gender or race. It is often argued that policy interventions should be mainly targeted at arresting discrimination based on these uncontrollable circumstances.

In this study, we estimate the contribution of unfair component of inequality – the inequality of opportunities – to total income inequality among Australia’s labour force population. This advances the literature on income distribution in the country, which has previously focused on examining the patterns of total inequality. We accomplish this by grouping the individuals into groups that share similar circumstances based on age, gender, race, geographical location and parental occupation, and decomposing inequality that exist between and within these groups. Our results suggest that in 2013, at least 19% of inequality of annual income before government transfers and taxes, and 17% of inequality of annual income after government transfers and taxes can be attributed to inequality of opportunities. We also observe increases in this unfair component of inequality over the past decade that coincides with periods of strong economic growth before the Global Financial Crisis. Drawing from the results of previous studies, we find Australia’s share of inequality of opportunities to be higher than Western countries with comparable data. This implies that Australia needs to be more vigilant in promoting a more equitable distribution of socio-economic opportunities.

Published

August 25, 2015