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What’s to be done about SA’s growing inequality?

Since 1994-95, South Australia’s standard of living has fallen compared to the rest of Australia. And that’s not all, says Richard Blandy who looks at what can be done to stop us “getting the worst of the adjustment stick”.

Feb 09, 2016, updated Aug 29, 2019

A legitimate objective of government economic policy is a distribution of living standards that is fair and equitable between individuals and families.

Judgements as to what is fair and equitable differ, of course. But a more equal distribution of living standards is usually regarded as better than a less equal distribution. The reason for this is clear: the value of an extra dollar for someone who is poor is sensibly regarded as greater than for someone who is rich.

Inequality in income distribution has been on the rise in economically-advanced countries over the past 30 years or so, at the same time as their peoples’ living standards have been rising rapidly. Both trends are driven by the same things: technological change and globalisation.

Technological change (innovation) increases the productivity of the capital and labour resources of each country that adopts the technological change. This increases the output that the country can produce. The country grows faster.

Globalisation (freer international trade) allows each country to produce (and export) more of those things in which it has comparative advantage, and to produce less (and import more) of those things in which its trade partners have comparative advantage. Productivity and incomes rise.

But technological change does not uniformly benefit all the resources in a country. The new technology (innovation) nowadays seems to be increasing the demand for skilled (more productive and better-paid) workers in economically-advanced countries – workers that can use the technology – and to be reducing the demand for unskilled workers that can’t use it.

The reverse was true in the Industrial Revolution, when skilled weavers were displaced by power-driven looms, for example.

Further, advanced countries have comparative advantage in skilled work, because they have a lot of skilled workers relatively to unskilled workers compared with the developing countries with which they are trading. Unskilled workers in developing countries benefit more from the expansion of trade, while skilled workers in the economically-advanced countries benefit more.

Both of these forces tend to increase inequality in the economically-advanced countries because the skilled, who are the better paid workers, benefit most. Further, the technologies and comparative advantage specialisations being adopted in the economically-advanced countries are capital-using, so incomes from capital ownership increase.

What can be done to counter the increase in inequality?

But maybe the unskilled are unskilled because they find learning skills difficult, for many reasons. So, why not, instead, give the unskilled more physical capital – share portfolios, for example, or grants or loans to start their own businesses?

Making sure that school-leavers are well-educated so they can learn skills for which there is rising demand is clearly important. Otherwise more unemployment will result. Social security and welfare schemes to support those whose (often unskilled) job opportunities are growing only slowly or disappearing entirely are also important. A rising unemployment rate and increasing inequality does not seem a good result, even if people are, on average, better off. Many are better off, but a few are a lot worse off.

What can be done about this situation, which may be said to typify what is happening in Australia? Unfortunately for South Australia, the unskilled jobs going under seem to be concentrated here, while the skilled jobs expanding are spread around the rest of the country. We are getting the worst end of the adjustment stick.

This is borne out by data on income distribution released by the Australian Bureau of Statistics on 16 December 2015[i].

These data show that the distribution of household income did become more unequal in Australia between 1994-95 and 2007-08, but that the rise in inequality has tapered off a bit since then.

In South Australia, by contrast, while inequality increased up to 2007-08, the large fall in inequality since then makes peoples’ incomes now in South Australia less unequal than in 1994-95.

This has happened because South Australians have not had the gains at the top of the income distribution that have happened elsewhere in Australia. In 1994-95, the average household income in South Australia was 93 per cent of the average household income in Australia as a whole. In 2007-08 it was still 92 per cent. But by 2013-14 it had fallen back to 88 per cent. Since 1994-95, our standard of living has fallen by 5 percentage points relative to the rest of Australia, mainly over the past six years!

Over the past six years, average household income in South Australia has increased by only $4 (in constant price terms), whereas in Australia as a whole it has increased by $46 (despite the GFC). By contrast, in the good times up to 2007-08, average household income in South Australia increased by $319 (in constant price terms) compared with $353 for Australia as a whole.

One answer to this sort of rise in inequality (in Australia as a whole) is to recognise that the people losing out are the unskilled, and that the people gaining have successful investments in human capital (skills) or physical capital (shares, owning businesses). As a people, we have emphasised trying to increase the skills of the unskilled as an answer to this problem. But maybe the unskilled are unskilled because they find learning skills difficult, for many reasons. So, why not, instead, give the unskilled more physical capital – share portfolios, for example, or grants or loans to start their own businesses?

The size of these gifts of capital should be the equivalent of the cost of continuing schooling to Year 12 plus a four-year degree at university, maybe $100,000. They could be classed as HECS debts, repayable if the recipients’ income levels reach a repayment threshold, as presently happens for people who go on to study at university. This would be equitable and offer a real incentive for young people who would otherwise feel that the dice are loaded against them, simply because they don’t like school.

These gifts of capital should be used only to make investments in future income streams, including investments in start-up businesses. Spending them on immediate consumption should be ruled out by the authority that would be set up to oversee the program.

This program would take some time to have a noticeable effect on the income distribution because it is aimed at younger Australians. There are borderline issues as well: where to draw the line in age terms about who can be included – how to deal with people who fall outside the program because they are too old, for example.

Richard Blandy is an Adjunct Professor of Economics in the Business School at the University of South Australia

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