Issue 2/2012: Income inequality: a review of recent trends and issues

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  • Issue 2/2012: Income inequality: a review of recent trends and issues

Income inequality: a review of recent trends and issues

Unfortunately I did not get to meet Professor Gale but I have read many of her works and the view I took away was that of a person of great intellect, integrity and compassion and I am deeply honoured to give a lecture in her name. When choosing a topic, I thought of her efforts in promoting Aboriginal and women?s rights and decided that looking at income inequality would be appropriate. The purpose of the lecture is to provide a brief review of recent trends and issues surrounding income inequality in Australia. The talk is designed for non-economists but I hope to provide material of interest to economists as well.

It has become out of fashion for economists to talk about equity but it is important to remind ourselves of the fundamental importance of equity and its close links to justice and ethics. Individuals care about their own level of wellbeing but they also care about the level of inequality in their society and the redistribution of income is a major function of governments. A recent survey conducted in various countries including Australia by the Harvard Business School and reported in the Sydney Morning Herald showed that Australians generally want a greater level of equality in their society. It was also revealed that the perceived level of inequality by Australians is lower than the actual level of inequality in the Australian society.

Although a different concept, inequality is closely related to poverty and all its associated problems such as poor health, both physical and mental, high crime rates, low educational attainment, low levels of involvement in the political process and in community life, and lower productivity.

Many economists believe that there is a trade-off between equity and efficiency. This belief is grounded in the importance of incentives: rewards must be given to encourage greater risk-taking, effort-taking, skill acquisition and development of abilities. However, inequality may reflect inefficiencies such as discrimination and other market imperfections. Furthermore, high levels of inequality can cause inefficiency in the economy; the alienation of groups can bring about the breakdown of cooperative behavior and lead to inefficient equilibria. This issue has been the topic of papers on polarisation by researchers such as Professor Debraj Ray at New York University and my colleague Professor William Schworm.

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