Productivity Commission tackles the inequality Rorschach

By David Donaldson

Wednesday August 29, 2018

Concerned that partisans are cherrypicking the data on inequality, the Productivity Commission has waded into the debate, urging a refocus on persistent disadvantage instead. 

Inequality has grown across much of the western world in recent decades, likely contributing to the election of Donald Trump and populist upheavals in other places.

This has led some in Australia to raise concerns that the rich are getting richer and the poor poorer here as well.

So the Productivity Commission decided to set the record straight, releasing a report that summarises the current data.

Their conclusion is fairly mixed: income inequality has risen slightly but Australians across all income deciles have benefited from decades of economic growth. Social mobility is “high” in Australia, so while some people are on low incomes, it’s more likely to be temporary.

The mining boom worsened inequality somewhat, but the post-global financial crisis period has seen some improvement.

Income has grown for all deciles, but for the richest most strongly. Source: Productivity Commission.

The report also shows that Australia’s tax and transfer systems substantially reduce income inequality and relative to other OECD countries, Australia redistributes less income but does a much better job of targeting this redistribution to low income earners.

When you account for in-kind services provided to people on low incomes, such as health, education and public housing, the picture is better than if you’re just looking at dollars, says Harris.

Wealth inequality has grown, in part thanks to the house price spike and growing superannuation, as wealth has increased on average for all households except those in the bottom decile. Yet Australia still ranks 8th most equal on wealth among the 28 OECD countries.

“While the perception often is that the glass is half empty, the most accurate picture that can be drawn from the data suggests that each generation is still better off than its predecessor, and that movements in inequality indexes are slight rather than serious,” said Productivity Commission Chair Peter Harris.

The commission thinks the common perception of worsening inequality might be being fuelled by lower income growth in recent years. Young people in particular have seen almost no income growth since the GFC.

Persistent disadvantage

Despite its lack of concern about inequality growth, the commission is worried about persistent disadvantage. Despite 27 years of uninterrupted growth, the poverty rate still remains the same.

“Relative to other OECD countries, Australia redistributes less income but does a much better job of targeting this redistribution to low income earners.”

“It has varied a bit throughout that period but today, for 2 million or so people, we are where we were thirty years ago,” said Harris at the National Press Club yesterday, in his final major speech before he hands over the reins to Treasury official Michael Brennan in September.

While some of those low earners are students, small business owners building a capital asset or asset-rich pensioners, there are many Australians still struggling to break out of poverty.

“We have measures in this study to show how forms of poverty for children in particular have actually risen over the last twenty years,” Harris added.

About 3% of Australians (roughly 700,000 people) have been in income poverty continuously for at least the last four years.

“People living in single-parent families, unemployed people, people with disabilities and Indigenous Australians are particularly likely to experience income poverty, deprivation and social exclusion,” notes the report.

“For people in these circumstances, there is an elevated risk of economic disadvantage becoming entrenched, limiting their potential to seize economic opportunities or develop the skills with which to overcome these conditions.

“These risks are particularly elevated for children living in jobless households, which is a group that has stood out among the multiple measures of inequality and disadvantage.”

Fixing the problem

Income growth is, of course, one of the most powerful ways to address poverty.

And this being the Productivity Commission, Harris’ speech naturally turned to productivity growth, which has been weak in recent years.

Noting that Scott Morrison — Treasurer until very recently — has lamented that there are no low-hanging fruit left in structural reform, Harris responded that not all the fruit in the Hawke and Keating era “were low‑hanging by any means”.

Setting out a clear reform path might even be a “significant political differentiator” in the current “febrile political environment”, he suggested.

He pointed to three key areas from last year’s Shifting the dial report into how to improve productivity:

  • Higher workforce participation and personal wellbeing through preventing chronic disease;
  • More adaptable workforce skills through practical improvements to secondary and tertiary teaching;
  • Reducing the number and complexity of overly restrictive planning and zoning restrictions to make it cheaper and easier to live and work in our congested cities.

Better targeting policies in areas such as health and housing towards those most in need — what Harris calls “hand-made policy” — will also be required, he said.

Multiple interpretations of the data

The commission decided to release this report because inequality is a topic that “continues to draw diverse and competing views.”

“No single metric is sufficient to give a definitive answer to the seemingly straightforward question: have inequality, poverty and disadvantage in Australia risen, fallen or remained steady in recent years?” says the paper.

“Our focus, therefore, eschews the specific and often self‑serving use of any one measure of inequality.”

Australia’s income growth has been much stronger across the board in recent decades than the US or UK. Source: Productivity Commission.

Indeed, it seems there’s something in the data for everyone.

For his part, Harris recommends politicians redirect their focus from inequality growth to persistent disadvantage:

“So, as political parties ask themselves what are good ways to respond to the popular view that the benefits of growth are not being shared, rather than narrow the search to a favourable statistical model of inequality, perhaps it might be better to focus instead on persistently disadvantaged elements of this group.”

Some might think it’s splitting hairs to tell politicians to shift from inequality growth to entrenched disadvantage, but who else will if not the Productivity Commission?

Notwithstanding the commission’s noble intentions, responses to the report have broken down pretty much as you’d expect.

Unsurprisingly, The Australian is having a field day. “ALP inequality claims sunk”, reads one headline. “Progressive article of faith blown up” another. Judith Sloan recommends “Shorten should do his homework on inequality”.

At The Guardian, however, it’s “Productivity Commission sounds alarm on inequality” (though they focused on persistent disadvantage… which is about inequality, after all).

Labor MP Andrew Leigh, one of the country’s top experts on inequality before entering parliament, tweeted that the report “provides some strong counter-evidence” to the claim that inequality isn’t rising.

At least they tried.

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