Earnings and inequality

Abstract

Despite strong economic growth and low inflation, many Australians believe that the benefits and costs have not been fairly shared and that inequality has been rising. This paper examines the apparent increase in the dispersion of earnings, which is central to the concern about rising inequality. The major finding is that the widening dispersion of earnings is principally due to changes in the structure of labour demand in favour of more skilled jobs. Relative rates of pay for major occupation groups appear to have hardly varied over the last twenty-five years. By contrast full-time employment grew strongly in the 1990s in the most highly skilled and paid occupation groups, and fell in the middle and lower skilled occupation groups. Part-time employment did increase substantially in some of the lower skilled occupation groups, but other studies have shown that the increase in total hours worked was skewed heavily in favour of the most skilled occupation groups. The paper then considers what this changing job mix implies for policy directed to maintaining income equality. The stability of relative wage rates suggests that changes in the system of relative wage determination would not help to reduce inequality. Instead the focus must be on job creation. It is argued that aggregate wage restraint, encouraged through a wage-tax trade-off, is the most promising way to increase the employment content of economic growth, while avoiding further increases in inequality. In addition, changes in the structure of demand and technology are biasing the pattern of employment change so that a substantial expansion in the quantity and nature of education and training will be necessary to allow disadvantaged people to take up the jobs that are being created. Over time a more equal society is likely to depend on levelling up by further increasing the proportion of people in highly skilled and paid jobs, rather than levelling down by seeking to return to the past structure of employment.