Chapter 9 - The goal of equity in the distribution of income

Question 1

What is the goal of equity in the ​distribution of income?

Answer 1

The goal of equity in the distribution of income is not about achieving ‘equality’ in the way that incomes are shared. This is because some inequality is a necessary feature of a ‘capitalist’ system that is underpinned by self-interest and the desire to maximise personal income and wealth.

Question 2

What are the 3 sub-goals for achieving equity in the distribution of income?

Answer 2

1. To ensure that all Australians have sufficient incomes to purchase those goods and service that enables them to have a dignified standard of living. This involves households being able to afford the goods and services that allows them to live in our affluent and modern society with some ‘dignity’ and ‘self-**respect’.
2. To ensure there are no persons or households in Australia experiencing absolute poverty, defined as the situation where on can’t afford to purchase the goods and services necessary for survival.
3. To ensure that huge or obscene inequalities in incomes (and to a lesser extent wealth) are avoided such that the social and economic costs of inequality do not exceed the benefits.

Question 3

What is the difference between Equity and Equality?

Answer 3

• Equity is more closely related to fairness
• Equality is more closely related to evenness

Question 4

What is the ABS Household income definition?

Answer 4

ABS Household income definition: household income consists of all current receipts, whether monetary or in kind, that are received by the households or by the individual members of the households, and which are available for, or intended to support, current consumption

Question 5

What is the definition of ​Earned Income?

Answer 5

Earned Income: represents a reward to individuals for their direct or ‘physical’ contribution to the production process.

Question 6

What is the definition of Unearned Income?

Answer 6

Unearned Income: represents a reward for the indirect contribution to the production of goods and services (e.g. capital).

Question 7

What is the definition of Factor Income?

Answer 7

Factor Income: earned and unearned income taken together

Question 8

What is the definition of Transfer Income?

Answer 8

Transfer Income represents income that is transferred from one group to another, usually via the government.

Question 9

What is ​Private or Market Income?

Answer 9

Private or Market Income is income that is received in the market place primarily as a result of individuals making a contribution to the production process, such as supplying their labour (including entrepreneurship) to the business sector.

Question 10

What is the definition of ​Gross Income?

Answer 10

Gross Income: this is private or market income plus direct cash benefits received from governments such as pensions, family tax benefits and job search allowance (unemployment benefits).

Question 11

What is the definition of Disposable Income?

Answer 11

Disposable Income is the gross income less the direct taxes levied by governments (personal income taxes). It provides an even better indicator of the ability of households to purchase goods and services.

Question 12

What is the definition of Social Wage Income?

Answer 12

Social Wage Income is disposable income plus indirect government benefits provided in the form of goods and services such as public housing, education, health and welfare.

Question 13

What is the definition of ​Final Income?

Answer 13

Final Income is the most extensive type of income and includes social wage income less production (or indirect) taxes. It represents the best measure of the overall command that income has over economic resources.

Question 14

What is the definition of Equivalised Household Income?

Answer 14

Equivalised Household Income uses disposable incomes and adjusts it to take into account the size and composition of households.

Question 15

What are Income Distribution Tables?​

Answer 15

Income Distribution Tables: the ABS determines equivalised households incomes and places them in a ranking from lowest earning households to highest-earning households, they are then typically placed into five groups (quintiles).

Question 16

What is the Lorenz Curve?

Answer 16

Lorenz Curve

The Lorenz Curve is derived from household income data and is a diagrammatical representation of the degree of equity in the distribution of income.

If the Lorenz curve was to sit further away from the line of absolute equality, it would mean that inequality was higher. If it were to sit closer to the line of absolute equality, it would mean that inequality was lower.

Question 17

What is the Gini Coefficient?

Answer 17

The Gini Coefficient is derived from the Lorenz curve and will be a number between zero and one that provides another indicator of the degree of inequality in the distribution of income.

Gini Coefficient = A/(A+B)

Total Inequality = 1

Total Equality = 0

Question 18

What is the definition of Absolute Poverty?

Answer 18

Absolute Poverty occurs when a person or a household has insufficient income to purchase the basic necessities such as food, clothing and shelter.

Question 19

What is the definition of ​Relative Poverty?

Answer 19

Relative Poverty occurs when a person or household has low levels of income compared to other individuals or households in society or compared to a generally agreed standard.

Question 20

What is the Henderson Poverty Line?

Answer 20

The Henderson Poverty Line was developed in the early 1970’s following a Commonwealth inquiry into the incidence of poverty in Australia. The poverty lines that flowed from the inquiry were designed to provide a benchmark level of income for various household sizes, below which, the household was considered to be living in relative poverty.

Question 21

What are the ​social costs of inequality?

Answer 21

The social costs of inequality provide the overriding motivation for governments to reduce the degree of ‘inequality’.

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Question 22

What are the economic costs of inequality?

Answer 22

Other economic costs of inequality:

• Cost to government of supporting persons who require income support.
• There can be short short-term costs to economic growth that are related to the fact that lower income earners have a much higher marginal propensity to consume than higher income earners.
• There is the cost in terms of lost satisfaction that relates to the law of diminishing marginal utility. As relatively more income is earned by higher income earners relative to lower income earners, the extra satisfaction they enjoy from each additional dollar of consumption is likely to be less than the utility that would otherwise be enjoyed by lower income earners.

Question 23

What are the social benefits of some inequality?

Answer 23

Social benefits of some degree of inequality include:

• People are motivated to become more creative or entrepreneurial in the hope of increasing their income overtime.
• Similarly, there are likely to be more individuals, whose pursuit of greater income and wealth, provides them with a constant goal and feeling of making progress.

Question 24

What are the economic benefits of inequality?

Answer 24

Economic benefits include:

• The quality of a nations labour force will be higher as a result of individuals seeking to improve their skill levels.
• The quality of a nations capital stock will be enhanced by the continuing drive for greater profits by entrepreneurs and those investing in business.
• With higher levels of labour and capital productivity, a country will enjoy all the benefits that higher productivity brings.

Question 25

What is the relationship between inequality and other economic goals?

Answer 25

• The lower costs of production leads to lower prices and therefore helps to achieve the goal of low inflation
• Lower inflation rates will lead to an improvement in international competitveness and help to acheive strong and sustainable economic growth.
• The creation of paid employment as the size of the economy expands helps to achieve to governments full employment goal.
• The boost to international competitiveness helps to boost net exports, achieving a reduction in both the CAD and NFD, thereby helping to achieve the goal of external stability.

Question 26

What is the trade-off between equity and efficiency?

Answer 26

It was noted that, on the one hand, a more equal distribution of income may not provide the right incentives for individuals and businesses to increase productivity, to innovate, or take risks that may lead to a more prosperous society with higher levels of GDP per capita over time.

On the other hand, if an economy is focused on achieving efficiency without regard for equity consequences, then society’s overall living standards may fall.

Question 27

Factors that may influence the distribution of income over the recent years: Recent Budgetary Policy Initiatives

Answer 27

• Means testing of a number of transfer payments, such as the ‘baby bonus’ and family tax benefits.
• Increase in the luxury car tax from 25% to 33%
• Increasing the progressivity of the income tax system over the recent years by lowering the effective tax burden for lower and middle-income earners by more than that for high-income earners.
• Increasing co-contribution into super accounts for low-income earners.

Each of the above initiatives will continue to improve equity in the distribution of income over time, exerting a downward pressure on the gini co-efficient and improving the ability for low-income households to afford the goods and services that are required for a dignified standard of living.

Question 28

Factors that may influence the distribution of income over the recent years: Economic Growth & Employment

Answer 28

Strong rates of economic growth create substantial employment gains, helping to reduce unemployment rates to lower levels which then reduce the reliance on welfare.

Question 29

Factors that may influence the distribution of income over the recent years: Microeconomic Reform Policies (MRPs)

Answer 29

These supply side policies have been universally applied to improve productivity, efficiency and international competitiveness of Australian industries in an effort to boost productive capacity and sustainable rates of economic growth. Unfortunately, a downside to these policies is the negative impact they had on structural unemployment, underemployment and potentially long-term unemployment. Many businesses were forced to restructure in the newly deregulated (or competitive) market place, which often involved substitution of labour for capital.

Question 30

Factors that may influence the distribution of income over the recent years: Low inflation

Answer 30

Australias low inflation rate over the last four years has helped to have a positive impact on equity via beneficial effects that inflation has had on economic growth. In addition, low rates of inflation have helped protect the real wages of workers, particularly those with little bargaining power (low skilled).