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Over the past year, there has been considerable disagreement about whether inequality has been rising or falling in Australia.

There has also been debate about what governments have actually been doing about inequality, with claims that the Turnbull Government has surrendered to “the politics of inequality”, according to researchers from the Centre for Independent Studies arguing for further cuts in public expenditure.

At the same time, as economist and Fairfax columnist Ross Gittins recently pointed out, the Government is attempting to proceed with budget cuts in social security that will save $478 million over four years at the expense of some of those actually most in need.

The evidence for trends in inequality is mixed.

On the one hand, new analysis has found that CEO remuneration for ASX100 companies is now 78 times average weekly earnings. Over the year to May 2017, average earnings for full-time workers increased by about 2.1 per cent — barely more than the inflation increase of 1.9 per cent — while for CEOs the increase was 3.5 per cent.

This appears to continue longer-term trends.

Research by Andrew Leigh and Mike Pottenger in 2013 found that BHP CEO earnings were as low as six to seven times average earnings in the late 1970s, before rising to 50 to 100 times the average Australian earnings by the 2000s — and 150 to 250 times average earnings when including long-term incentives, such as share options.

Over the period since the late 1970s and early 1980s, it is not just CEOs who have done better than average workers.

The World Wealth and Income database shows that in Australia, the income share of the richest 1 per cent of the population has doubled from about 4.5 per cent of all income in 1982 to 9.1 per cent in 2013.

Interestingly, this increase is quite common across countries — in Sweden the corresponding increase was from 4.1 per cent to 8.7 per cent of all income held by the richest 1 per cent.

For the United States there was also a doubling in the income share of the richest 1 per cent — but the start and end were much higher, with the share of the richest 1 per cent of Americans going from 10 per cent to 20 per cent of all income.

Pre-GFC inequality worse than now

But inequality is not just a matter of what happens to the richest 1 per cent or the much smaller proportion of the population who are CEOs.

The most comprehensive picture of trends in inequality is given by the Australian Bureau of Statistics, which has conducted surveys of household income inequality since the early 1980s, with the most recent survey being in 2015-16.

The most widely used measure of inequality is a statistic called the Gini coefficient, which varies between zero — when all households have exactly the same income — and 1 — when one household has all the income.

Chart 1 shows what has happened to the Gini coefficient over the last 35 years or so. What is readily apparent is that income inequality has gone down in some periods, but overall it is clear that it has increased over time.

The peak level of income inequality was in 2007-08, just before the global financial crisis (GFC).

It is now a little lower than it was before the GFC, and it is difficult to identify a clear trend — either upwards or downwards since then.

While the Gini coefficient is a useful way of summarising the overall trend in inequality, it is important to recognise that inequality is the product of many different factors and conflicting trends.

Aged pension changes help some, not others

Inequality is not just a matter of what happens to CEO pay or the incomes of the richest 1 per cent compared to the wages of average workers, but also to changes such as the ageing of the population, the growth in two-earner families, changes in part-time work and under-employment, as well as changes in the income tax and in the social security systems.

Part of the disagreement about what is actually happening to inequality trends reflects concerns about what is happening to these individual factors, which have different impacts on different parts of the population.

For example, there was a fall in the Gini coefficient in the two years after the GFC, in part because of the substantial increase in age pensions under the Rudd government. At the same time, unemployment increased.

The increase in age pensions reduced inequality, but if you lost your job in this period you could have ended up on the much lower rate of Newstart — and not felt that inequality had fallen.

The proposed budget changes to social security that are currently being debated highlight the complex politics of inequality.

Australia targets its social security spending to the poor more than any other rich country, and despite common perceptions has less “middle-class welfare” than almost anywhere else in the world.

But because Australia has the most targeted social security system in the OECD, the OECD has itself pointed out that cuts in social security in Australia increase inequality and poverty more than any other rich country.

First published at the ABC News on Thursday 7 December 2017.

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