There is a substantial amount of inequality with regard to the distribution of income in Australia. Sources say it is becoming slightly worse in recent years. In 1999-00, top 20% of income recipients accounted of 48.5%. They had average weekly income over 12 times higher than the average income of the bottom 20%. The bottom 60% of income recipients receive less than 30% of total income.
There are economic and social advantages and disadvantages of inequitable distribution of income. Economic benefits occur when there is an increase in the productive capacity of resources and thus an increase in real GDP per capita.
The first benefit is that the labour force is encouraged to increase education and skill levels. Since jobs with higher qualification and skills provide higher income, the labour force will want to improve their education and skill levels in order to receive a higher income. Thus there is an increase in the quality of the labour force.
Secondly, the labour force is encouraged tow work longer and harder. The longer the hours you work, the higher the income you will get. Therefore it produces an incentive for workers to work longer and overtime, which enhances economic growth. In addition, the higher pay for increased output will encourage labour to move where it is most needed. A more mobile workforce will lead to a more efficient allocation of resources and a higher rate of economic growth.
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Entrepreneurs are encouraged to more readily accept risks associated with business. If they do not receive bonus for their risk taking, there will be fewer entrepreneurs and therefore a lower rate of economic growth, less jobs and a reduction in their productive capacity in the economy.
Last but not least, there is a potential for higher savings and capital formation. Since there will be more high income earners in an inequitable distribution of income, and the higher the income an individual earns the greater the proportion of income will be saved, savings will increase in the economy and this will reduce Australia’s reliance upon foreign capital.
Unfortunately the advantages of economic inequality are accompanied with the disadvantages.
Firstly, overall utility, the satisfaction for the goods and services by the consumer is reduced in our society. This theory is based on the assumption that high income earners gain less satisfaction from an increase in their income than people who earn lower incomes. The reason being as more of a certain good is consumed, it will begin to provide less utility to the consumer.
This means that and extra $1 income would be of more worth to a low income earner than to a high income earner. This suggests that a more equal distribution of income will be beneficial to the total utility. Unfortunately, it is extremely to gain an accurate assessment of relative utilities.
Secondly, consumption and investment is also reduced. People who earn a low income spend more of their money than high income earners. The reason for this is that they need this money go towards the basic necessities. Therefore if we have more inequality, less of the income will go towards consumption. This leads to towards lower economic activity, employment and overall living standards.
Furthermore, high income earners tend to spend their income on luxuries such as designer clothes, extravagant goods and services, that are not needed creating a “leisure class”. This establishes an individual’s wealth and creates hierarchy, but poor people are not benefited from this consumption.
Moreover, there is less work and work efficiency in the economy. Inequality of the income causes relative poverty. As a result, this reduces educational opportunities, lowers individual’s self confidence and this can in time end up with many people not working to their full potential or not working at all.
Many people rely on the government to provide welfare support which is an income for people who are unemployed, elderly, or with disabilities. This places demand on the government revenue as there are many people on low income who rely this government aid.
Lastly, as a result of distribution of inequality income, economic growth has slowed down. Since there are more high income earners in Australia, they tend to save more of their income so there is less consumption and contribution to economic growth.
Inequality of income can bring several social benefits, such as the fact that inequality of opportunity exists in Australia which gives high income earners easier access to gain better education and opportunities. This ensures that they will gain admission to tertiary education which will allow them to have higher paid jobs.
Secondly, there are people who do not share high physical and mental abilities or potential when it comes to the acquisition of income and wealth. Some people are better at physical labour which usually means lower paid jobs rather than those who are academically minded which in our society means higher paid jobs.
Finally, some people can gain wealth to inheritance and trust funds, and they have opportunity to build up their wealth through investing, unlike those who start off with nothing.
There are two major social disadvantages of inequality. First one being that there is a class division which causes tension between people with different jobs and regions. This can lead to disputes between people, which will in turn bring about an instable society which can lead to an economic disruption.
There are still many Australians who live in relative poverty. For these people, life is hard and they are subjected into low incomes and very little economic opportunities. Increased level of crimes, diseases, and reduced life expectancy are linked with very high poverty levels.
To conclude, in the Australian society, distribution of income is very much in favour of high income earners, which leads to benefits and consequences socially and economically.
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