The Major Social and Economic Costs and Benefits of Income Inequality

The labour force consists of all the employed and unemployed persons in the country at any given time. Glenn Stevens the governor of the RBA suggests that the Australian labour market in conjunction with the free market price mechanism facilitates income inequality within the Australian Economy. Income inequality within the Australian economy is measured by the gini coefficient. Australia’s Gini coefficient according to the ABS stands at 0.53 this indicates a moderately high level of income inequality within the economy. The benefits of income inequality may be that it encourages the labour force to increase education and skill levels and it also encourages the labour force to work longer and harder. Some of the economic costs of inequality may be that inequality reduces overall utility and it can reduce economic growth. Subsequently there are mainly economic benefits of inequality, but social costs are involved. Whilst theory suggests that greater growth may be achieved through either reducing or increasing inequality. SMH Economist Jessica Irvine suggests that to maximize growth in the Australian economy, income equality must be reduced in order facilitate in spending areas of structural change.
The two major social costs of inequality are those associated with social class divisions and poverty. Social class divisions make reference to the distribution of income and how wealth creates class distinctions in modern economies, such as between groups broadly described as upper class, middle class and working class. These divisions can sometimes lead to social and economic instability. In 2013, a group of researchers from UNSW had found that only 2% of Australia’s population had classified themselves as the upper class on the nation’s economic totem pole whereas 57% of Australia’s population had classified themselves as the middle class.
However the source of these social divisions stems from the different income levels within the labour market. The labour market price mechanism facilitates inequality through the supply and demand of workers in differing industries. According to the treasury report 2009, skilled workers in the Australian economy earned on average 33.75% more than unskilled workers. The differing wage levels create a great level of inequality and subsequently lead to poverty. Poverty tends to trap families into a vicious cycle of low incomes and limited economic opportunities. . Cassandra Goldie the CEO of ACOSS states in news report in the SMH, “Yet today, this report we’re releasing says we have 2.2 million people who are living below the poverty line. The ABS states that NSW has the highest number of people living in poverty. 835,000 people live in poverty just in New South Wales. Whilst there are many costs associated with social class and poverty. Economist Bill Evans suggests that these costs drive incentive for individuals to contribute to the labour market in order to improve quality of life. This incentive for individuals is imperative to maximize the productive capacity of labour which will lead to increasing levels of economic growth.
There are two main economic costs of inequality these are that it creates conspicuous consumption and reduction of consumption and investment. Some economics argue that inequality in the distribution of income creates a ‘leisure class’ consisting of the higher income earners in society. The leisure class puts a large proportion of their money towards ‘conspicuous consumption’, which is the consumption of expensive goods and services, such as designer label clothes, purely for the purpose of displaying wealth. This can contribute towards a culture where individual’s sense of their own worth depends on their relative position in the wealth and income hierarchy. The ABS suggests that 68% of Australian’s engage in conspicuous consumption. A recent news article in the SMH by Jessica Irvine states that Australians are frequently engaging in conspicuous consumption. The result of this spending is an increase in inequality and decreased savings leading to lower levels of economic growth. Inequality reduces consumption and investment.
These two components are vital to aggregate demand (AD = C +I+G+X-M) and because the labour market is derived from aggregate demand. A decrease in AD which stems from inequality has the potential to lead to a decrease in economic growth. Thus it is vital that inequality which stems from the labour market is addressed in order to maintain sustainable economic growth. The importance of reducing inequality is illustrated by the 0.8% increase in economic growth between the 2012-2013 financial years according to the ABS. The 0.8% reflects a minuscule growth rate compared to emerging economics such as China. Ross Gittens (economist) suggests that in order to remove the speed bump on Australian economic growth the government needs to reduce inequality which will boost investment, consumption and government spending. This will facilitategreater levels of economic growth in the Australian economyvia an increase in aggregate demand (AD = C +I+G+X-M).