Wealth inequality rising slowly in Australia

The Australian Bureau of Statistics released the – Household Wealth and Wealth Distribution, Australia, 2011-12 – today, which is drawn from the bi-annual Survey of Income and Housing (SIH),first published in for 2003-04. My interest is in how the distributions changed during the period of the crisis and the fiscal stimulus. We are currently working on an update to our – Employment Vulnerability Index – which we hope to release sometime next week. The preliminary results suggest that the fiscal stimulus significantly reduced the risk of job loss in the period after the crisis. But more on that when we have analysed our results more carefully. Today’s data shows that wealth inequality is rising slowly in Australia but will accelerate if the proposals to further demolish the income support system and increase tax breaks for the wealthy are introduced after the next election.

The publication – 6554.0 – Household Wealth and Wealth Distribution, Australia – provides the detailed analysis of the – Data.

The data is in fact a good case study of when to use median rather than the mean of a sample. Students studying statistics learn about when the mean should be used as a measure of central tendency and when the median is more suitable.

Both statistics provide some guide to where the “middle” of the sample (or population) is. However, their use is not straightforward.

The mean weights all observations equally and comes up with an “average” of the observations. But if there are outliers (extreme values) then it will likely give a flawed viewed of what is average despite the better mathematical and statistical properties that the mean possesses.

When a distribution is skewed to the right (which means it has an extended right-hand tail with extremely high values) the median will be less than the mean and is generally the better measure.

This applies to the case of income and wealth distribution data, where the very high income or wealth holders push the average up well above the median and make it look as though the socio-economic well-being of the sample is higher than the reality.

The ABS report that:

In real terms the value of mean household net worth in 2011-12 was $728,000 which is not statistically different from the value of mean household net worth in 2009-10 ($759,000). However the value of mean household net worth in 2011-12 ($728,000) is 9% higher than in 2005-06 ($667,000) and 24% higher than in 2003-04 ($585,000) …

Conclusion, we are on average, wealthier by a considerable margin relative to 2003-04 and not poorer relative to 2009-10.

However, in terms of the median net worth ($A434,234 in 2011-12 and $A368,813 in 2003-04) the growth was only 18 per cent.

Before we draw conclusions therefore, we should consider the distribution of the net worth data.

The following graph is compiled from data in Table 2 of the release. It should the distribution of household net worth in 2011-12. The brighter blue column is the range the mean sits in and the red column is the median range (noted above).

The ABS report that:

While the mean household net worth of all households in Australia in 2011-12 was $728,000, the median (i.e. the mid-point when all households are ranked in ascending order of net worth) was substantially lower at $434,000 … This difference reflects the asymmetric distribution of wealth between households, where a relatively small number of households had high net worth and a relatively large number of households had low net worth …

The data (from ABS Table 2) shows that “over 1.2 million households (14%) had net worth less than $50,000” while “114,000 of these households having negative net worth (1% of all households)”.

Around 75 per cent of the households had below average net worth.

The next graph shows how the net worth distribution has changed since 2003-04 by quintile. In 2003-04, the highest quintile had 59 per cent of the total net worth, rising to a peak of 62.2 per cent in 2009-10 and falling back to 60.8 per cent in 2011-12. The increased share has been at the expense of the middle three quintiles.

In absolute terms, the average household net worth has risen from $A585,264 in 2003-04 to $A728,139 in 2011-12, a rise of 24.4 per cent. However, overall, the average fell by 4.1 per cent in years between 2009-10 and 2011-12.

However, the overwhelming benefits of that growth has been in favour of the highest quintile which enjoyed a 28.3 per cent growth in their net worth, notwithstanding a 5.5 decline in the period 2009-10 to 2011-12.

The lowest quintile enjoyed an overall rise in net worth of 2.5 per cent between 2003-04 and 2011-12 but were much more impacted by the downturn with a loss of 7 per cent of net worth between 2009-10 and 2011-12.

The second quintile also lost 7.4 per cent of net worth over the last two years.

The following graph summarises the percentage changes in net worth for three periods – 2003-04 to 2011-12; 2005-06 to 2011-12 and 2009-10 to 2011-12 for each quintile.

In terms of income distribution, the ABS note that:

The distribution of wealth shows greater variability when compared to the distribution of incomes. This can be seen by analysing percentile ratios. The net worth of the households at the top of the 80th percentile was 11.6 times higher than the net worth of the households at the top of the 20th percentile (i.e. the ratio of the value of the top of P80 to the value at the top of P20). The corresponding P80/P20 ratio for gross household income was 4.5 …

There are many reasons why the inequality of wealth is greater than for income. The pattern is replicated in most nations.

The ABS note that life cycle effects contribute to this – younger households with high income are building wealth and older households with lower income are running down wealth.

Close analysis of the data also shows how important government pensions and other income transfers are to lower income recipients.

In terms of Equivalised Disposable Household Income, 73.3 per cent of total income earned by households in the lowest quintile comes from Government pensions and allowances. This proportion drops to 32.6 per cent for the second quintile and 3.9 per cent for the third quintile.

The constant attack on government income support payments to lower income groups undermines this redistributive capacity. But the data suggests that so far, those attacks have not undermined the capacity completely.

How do these changes and proportions compare to what we know about the US? I most recently (May 7, 2013) discussed movements in the US wealth distribution in this blog – Lower deficits now, undermine our grandchildren’s future.

The work of Ed Wolff shows that in 1976, the top 1 per cent of Americans held 19.9 per cent of total wealth in the US. In 2007, they held 34.6 per cent and by 2010 they held 35.4 per cent. In other words, the top 1 per cent have increased their share of total wealth. In 1983, the bottom 80 per cent had 18.7 per cent of total net worth. By 2010, that share had fallen to 11.1 per cent.

Further, while the Great Recession has wiped out wealth across the board it has impacted mostly on the bottom end.

[References: Wolff, E. N. (2012). The Asset Price Meltdown and the Wealth of the Middle Class. New York: New York University].

The ABS data, as presented, does not allow exact comparisons. But today’s ABS Australian data shows that the bottom 80 per cent had 41 per cent of total net worth in 2003-04. By 2011-12, that share had fallen to 39.2 per cent.

So while the top quintile have increased their share over that period a little, the relative shares are very different to the US. The bottom 80 per cent in Australia have a much greater share of net worth and have largely maintained that share over the last 10 years.

Conclusion

Relative short blog today as I have been immersed in number crunching. But this data release confirms that while income and wealth inequality has risen in Australia since the crisis began, the changes have not been as stark as in the US.

There is something to be said for a more comprehensive and progressive tax and transfer system (in Australia relative to the US).

That is enough for today!

(c) Copyright 2013 Bill Mitchell. All Rights Reserved.