Distribution of Income and Wealth

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Economics
Written report – distribution of income and wealth

Introduction
For several years, Australia has achieved steady economic growth, higher productivity growth, low inflation, and falling levels of unemployment. They have changed the structure of their economy which played an important role in creating a more efficient and competitive economy. One of the major challenges of the government policy was equal distribution of income and wealth between different groups in society. Government should ensure that it doesn’t happen that only those who are financially well off are benefited from the economic prosperity, which can increase the degree of inequality in income and wealth and make the society divided.

Australia has often been regarded as an egalitarian society in which the income and wealth are equally distributed. However, according to the statistics, Australia is one of the less equal societies in the industrialized world. In 1990’s, the level of inequality in Australia’s income and distribution surpassed that of most OECD countries, and over the 2000’s, the inequality has been worsened because of a sustained reduction in the level of unemployment, the expansion of compulsory superannuation and government policies to redistribute income to lower income households.

Part 1
The economic and social consequences of income inequality
As the inequality in Australia’s income and wealth increases, not only are there disadvantages but there are also some advantages associated with it.

■ Benefits of inequality
It is argued that inequality is a natural consequence of the free market economy in which the individual income and wealth are decided according to their marginal productivity. As people know that they can make more money than other people does if they work harder in the free market economy, the inequality encourages them to work harder to change their position in the distribution of income.

• Economic benefits of inequality.
1. inequality encourages the labor force to increase education and skill levels If the people who got the higher level of education and has better skills get more rewards, freshmen and existing participants in the labor force will make more effort to improve their level of education and skills. Unless those who get lower income can not afford to pay the fee for their education and training, the income inequality can be motive to improve the quality of the labor force.

2. Inequality encourages the labor force to work longer and harder. The idea that if they work longer and harder, they can earn higher incomes, encourages the workers to work overtime and thus, it may promote the economic growth. However, they have to give up their leisure time in order to work longer hours when they need more money.

3. Inequality makes the labor force more mobile
If one company offers more money to the worker who is already working in the other company, he or she will not refuse it unless there are big problems. Thus, the use of higher income encourages labor to move to where it is needed. The more mobile the movement of labor force, the more efficient allocation of resources and a higher rate of economic growth.

4. Inequality encourages entrepreneurs to accept risks more readily If there are no more reward for risk-taking in operating a business, then no one is willing to be an entrepreneur. Because of the prospect of considerable income rewards, they take the risk associated with business, and as the number of people working increases, the productive capacity in the economy increases.

5. Inequality creates the potential for higher savings and capital formation When an individual earns the higher income, he might be likely to save more money than other people might. However, in the case of lower income earners, vice versa. In theory, the greater the income inequality, the more increased savings in the economy because of the greater number of higher...
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