Income Distribution — Flashcards & Quiz

Q1: How is income inequality measured and what is the Gini coefficient?

Income inequality measures how evenly income is distributed across a population. The Gini coefficient is the most common measure, ranging from 0 (perfect equality: everyone has same income) to 1 (perfect inequality: one person has all income). Australia's Gini coefficient is approximately 0.33-0.34 after taxes and transfers, indicating moderate inequality. Other measures include: income quintiles (dividing population into five 20% groups), the 90/10 ratio (comparing top 10% to bottom 10%), and poverty rates (proportion below 50% of median income). Wealth inequality (assets minus debts) is typically higher than income inequality.

Q2: What factors contribute to income inequality in Australia?

Key factors include: differences in education and skills (tertiary-educated earn 50-80% more than non-graduates); occupational differences (executives vs low-skill workers); age and experience (earnings peak at 45-54); industry variations (mining/finance pay more than retail/hospitality); globalisation and technological change (increasing returns to skills while displacing low-skill jobs); decline in union coverage reducing worker bargaining power; casualisation and underemployment; discrimination based on gender, ethnicity, or age; inheritance and intergenerational wealth transfers; and geographic location (capital cities vs regional areas). Government policy, including progressive taxation and welfare systems, moderates but does not eliminate these inequalities.

Q3: What are the economic and social impacts of income inequality?

Economic impacts of high inequality include: reduced aggregate demand and growth (low-income earners have higher propensity to consume); inefficient human capital allocation (talented poor unable to afford education); reduced social mobility across generations; increased household debt as low-income earners borrow to maintain living standards; and potential financial instability. Social impacts include: increased poverty and social exclusion; poorer health and education outcomes for disadvantaged groups; higher crime rates and reduced social cohesion; political instability and populism; reduced equality of opportunity contradicting meritocracy principles. However, some inequality provides incentives for effort, risk-taking, and innovation.

Q1: A Gini coefficient of 0 represents perfect income equality where everyone has the same income.

Answer: TRUE

The Gini coefficient ranges from 0 (perfect equality) to 1 (perfect inequality where one person has all income). Australia's coefficient of approximately 0.33 indicates moderate inequality, between Nordic countries (~0.25) and USA (~0.40).

Q2: Wealth inequality in Australia is typically lower than income inequality.

Answer: FALSE

Wealth inequality (distribution of assets minus debts) is significantly higher than income inequality in Australia. While income Gini is ~0.33, wealth concentration is much greater: top 20% own 62% of wealth, while bottom 20% own just 1%, reflecting property ownership concentration and intergenerational transfers.

Q3: Progressive taxation and welfare transfers reduce income inequality in Australia.

Answer: TRUE

Australia's tax-transfer system redistributes income from high to low earners. The Gini coefficient falls from ~0.48 for market income (before government intervention) to ~0.33 for disposable income (after taxes and transfers), demonstrating significant redistribution effect.