Australians are working more hours for higher hourly wages, driving a two decade long substantial growth in personal and household income, according to a new report released by the Productivity Commission.

 The Trends in the Distribution of Income in Australia working paper found that Australia had experienced solid growth across all parts of income distribution over the 20 year period to 2009-10.

At a household level, strong increases in employment have offset any growth in the dispersion of individual income, causing a marked drop in measured inequality in household labour incomes. The report also found that once capital and other income is factored in, equality and income disparity drops even further.

Taxes have remained a significant equalising factor on the distribution of household income, according to the report’s authors Jared Greenville, Clinton Pobke and Nikki Rogers.

“While the growing dispersion in full-time earnings in Australia is also observed in other OECD countries, the strong improvement in Australia in both workforce participation and employment, particularly for households in lower income deciles, is not,” the report concluded.

The key points of the report include:

  • Between 1988-89 and 2009-10, the incomes of individuals and households in Australia have risen substantially in real terms and in comparison to trends in other OECD countries, with particularly strong growth between 2003-04 and 2009-10.
    • The increase has mainly been driven by growth in labour force earnings, arising from employment growth, more hours worked (by part-time workers) and increased hourly wages.
  • While real individual and household incomes have both risen across their distributions, increases have been uneven.
    • The rate of growth has been higher at the 'top end' of the distributions than the 'bottom end'.
    • Incomes for those in the middle of the distribution have spread out (that is, they have become less concentrated around the average).
  • These changes underlie the recently observed increases in summary measures of inequality (such as the Gini Coefficient) in Australia for individual and household incomes.
    • At the individual level, the key drivers are the widening dispersion of hourly wages of full-time employees and (to a lesser extent) the relatively stronger growth in part-time employment.
    • At the household level, the key driver has been capital income growth amongst higher income households. The impact of growing dispersion of hourly wages on the distribution of labour income has been offset by increased employment of household members including a decline in the share of jobless households.
  • Final income is also influenced by government taxes and transfers. These have a substantial redistributive impact on the distribution of household income, substantially reducing measured inequality.
  • Although the progressive impact of the tax and transfer system declined slightly from the early 2000s (with the introduction of the GST and a fall in the number of recipients of government benefit payments associated with higher employment), real growth in the value of direct and indirect transfers contributed to growth in incomes for low income households.
  • The analysis highlights the need to examine the changes in various income components and population subgroups in order to understand the changes in the distribution of income and inequality measures such as the Gini coefficient.
    • Differences in individual income, and therefore household income levels, occur for a variety of reasons including personal choices and innate characteristics as well as opportunities and inheritances. These differences combine with broader economic forces and policy settings to influence the distribution of income over time.

The full report can be found here