This piece was co-authored with Daniel Wild (Research Fellow, IPA). It originally appeared in the Sydney Morning Herald on 18 January 2018.
The most important task of public policy is to ensure the next generation of Australians have more opportunities to flourish than the last. But declining business investment, worsening school results, family breakdown, and youth joblessness suggest we are failing in this task.
This week, the left-leaning McKell Institute contributed to this important debate with the release of their report Mapping Opportunity: A National Index on Wages and Income.
Unfortunately, the report misses the mark.
First, the report asserts “inequality in Australia is at a 75-year high” based on the share of income earned by the top 1 per cent. But this measure has many shortcomings. It is a pre-tax measure which doesn’t account for the extra income low-income earners receive from welfare or the loss of income to high-income earners from taxes. It doesn’t account for other transfers from government and non-government organisations (such as medical care). And it counts individuals rather than households, even though most people organise their financial affairs within a family unit.
A better, although still deficient, measure of inequality is the Gini coefficient, which accounts for the effect of taxes and transfers. The best estimate of the Gini coefficient is provided by the Household, Income, and Labour Dynamics in Australia Survey undertaken by Melbourne University’s Melbourne Institute. This measure shows that income inequality is lower today than 15 years ago, when the data set begins, and is around the average of comparable OECD nations.
Second, the report says “Australia’s minimum wage is declining”. But the measure used is the minimum wage as a percentage of the median wage. This isn’t the minimum wage; the minimum wage is the minimum wage, and it has been increasing. According to the Fair Work Commission, the weekly minimum wage in Australia was $374.4 in 1998, compared with $694.9 today – an increase of 22 per cent in real terms. And according to the OECD, Australia’s minimum wage is equal second highest in the OECD.
Third, the report says wealth inequality is higher than income inequality. This is true, but largely the result of misguided public policy. Low interest rates, high immigration and housing supply restrictions have raised property prices, and low interest rates and compulsory superannuation have elevated share prices. All of this disproportionately benefits the wealthy. Moreover, the report ignores that Australia has one of the most equal distributions of wealth in the developed world, according to the 2017 Credit Suisse Global Wealth Report.
Fourth, the report says Australia has a “declining middle class with the few at the top becoming richer and the poor getting poorer”. The rich are getting richer, but so are the poor, the middle, and everyone else. According to the Australian Bureau of Statistics, real incomes for those in the bottom quintile grew by 58 per cent from 1994-2016.
Fifth, the report asserts “income inequality can give rise to a wide range of social problems … “. Inequality certainly is a problem where it is the result of unfair cronyism rather than reward for hard work. But the report fails to say what level of inequality is acceptable. There is seemingly no limiting principle, with the implication that only perfect equality can be considered just.
This has several bizarre implications. It implies that a society in which everyone is equally poor is better than one in which everyone is rich to unequal degrees. It implies that Australia would be worse off if an unemployed person found work and earned a high wage. It also implies that Bill Gates should be prevented from moving to Sydney in the interest of ensuring the Gini coefficient doesn’t increase.
Instead of focusing on inequality, public policy should be directed towards providing individuals the opportunity to live good and flourishing lives, regardless of how this affects income distribution. As we demonstrate in our November 2017 report, Understanding Inequality in Australia, this will often involve less government, not more.
Cutting taxes will increase job opportunities, reducing red tape will make it easier to start a business, and increasing school choice will improve education standards. While taxes and transfers may make Australia more equal in a narrow sense, they also reduce individuals’ access to opportunity and higher living standards.
However, more important than policy are institutions, cultural norms, and ways of life. Time-honoured truths are as relevant today as ever: pursuing a career, obtaining a good education, getting and staying married, participating in community and religious organisations, and eschewing crime and drugs and alcohol dependency are all necessary if people are to reach their potential and live a dignified life.
This knowledge, available to humans for millennia, has been erased in our modern times by an expansive state crowding out the institutions that passed this knowledge on, such as family, religion, and community.
To guide the next generation of Australians towards a life of opportunity and fulfilment, and to be flourishing, we need to rebuild the institutions of civil society. This is work that we can only do for ourselves – we just need government to let us get on with it.