There are two reasons for this. First, the industries vulnerable to the economic impacts of COVID-19 lockdowns rely heavily on low-wage, part-time employment. Second, the inner suburbs are home to the largest concentration of COVID-vulnerable workers.
If we do not act now, more people will get pushed out of inner areas rich in jobs and amenities to lower-cost outer suburbs with poor access to jobs and community services.
Which industries and workers are vulnerable?
Our research analyses where people employed in the industries most vulnerable to COVID-19 lockdowns live and the kind of work they do. We map vulnerable employment areas in all suburbs of Australia’s five largest capital cities. We then examine the characteristics of people in vulnerable employment living in all suburbs of Australia’s current coronavirus hotspot, metropolitan Melbourne.
We define vulnerable employment based on a detailed review of industries with one-third or more firms reporting reduced worker hours one week after the first COVID-19 lockdown (March 30 2020). These firms are mainly in the consumer, travel and community services sectors. They employ people working in accommodation and food, arts and entertainment, education, “non-essential” health care, retail and transport.
We profile the characteristics of vulnerable workers in each of these sub-industries and by suburb. We classify suburbs (using SA2 level data from the Australian Bureau of Statistics) by share of vulnerable employment based on the worker’s place of usual residence.
Many at-risk workers live in inner suburbs
As the map below shows, the largest shares of vulnerable workers live in Melbourne’s inner suburbs.
Vulnerability levels clearly diminish moving outward from the city centre. In other words, many vulnerable workers live in some of the highest-rent suburbs.
On average, the share of vulnerable workers in the very high vulnerability suburbs is 32.2% of employed residents. The figure exceeds 40% in some of these areas.
Workers likely to be forced to move
Living in the inner suburbs, combined with the nature of their jobs, puts many COVID-vulnerable workers at high risk of displacement.
In the very high vulnerability suburbs, 47% of vulnerable workers are on low or very low incomes. And 54.3% work part-time (less than 38 hours a week). A large proportion (41.9%) are aged under 30 and about one-third are 30-44.
In fact, over half (53.5%) of the vulnerable workforce living in very high-vulnerability suburbs hold jobs in the most precarious, low-wage consumer services industries – accommodation and food services and retail and personal services. Another 30% work in arts, entertainment and education.
Suppressed consumer demand will not only have short-run employment impacts, but might permanently alter consumption patterns. The result would be enduring business closures and job losses for workers who live in these areas.
To make ends meet, many of those facing job loss and other employment pressures such as reduced hours will seek more affordable housing in the middle and outer suburbs.
However, although the outer areas are now home to the smallest proportion of vulnerable workers, the vulnerable workers that live there tend to be worse off. Just over 66% are on low or very low incomes and 60% work part-time.
As a result, the migration of COVID-vulnerable workers to the outer areas will add to the existing concentration of spatial inequality in Greater Melbourne.
COVID-19 puts people working in low-end service jobs and the creative and educational services at high risk of losing their jobs. Those who manage to live in the high-cost inner suburbs are now particularly vulnerable.
It is therefore crucial to expand rather than retract the JobKeeper and JobSeeker programs. Proposed cuts to JobSeeker are estimated to push 370,000 Australians into poverty, 123,000 in Victoria alone. In tandem, we need interim policy in the rental housing market to defuse the impending “rent bomb” of tenants facing eviction if they can’t pay the accumulated debt of deferred rent.
Longer-term strategies are also needed. We must confront the reality that many service sector jobs will not return.
This requires investment in skills-building courses tied to strengthening the recovery of TAFEs and universities, particularly in areas like “essential manufacturing” – medical supplies, recycling, food – and communications technologies. JobTrainer is a good start.
Given the spatial dimensions of the crisis, place-based programs are crucial too. Preserving inner suburban industrial land can play a significant role in small enterprise start-ups, firm expansion and job creation. Inner industrial districts provide a flexible mix of space that allows businesses to grow and add quality jobs in place.
At the same time, policymakers can better develop community infrastructure and employment hubs in the outer suburbs. Community hubs provide flexible, multipurpose spaces that cater to various community needs. These services range from youth, aged care and health facilities to collaborative workspaces and settings for workforce training providers.
While COVID-19 is clearly taking an immediate toll on the health and economies of our cities, we need a conversation about the longer-term impacts and responses.
A housing boom that lasted from the mid-1980s with only minor interruptions has added to rising income inequality in Australia. Yet an impending housing market bust, triggered by the coronavirus pandemic and the resulting spike in unemployment, will not restore greater equality. On the contrary, recent history shows housing busts can worsen inequality.
Those who benefit most from a boom are not those who pay the price when it busts. And those harmed by the boom often become even more vulnerable during the bust.
Our analysis highlights the risks for people who bought their first home at the peak of the boom. We estimate 24,000 households are at very high risk because they took out large loans that might soon exceed their home value and also work in sectors with high job losses. Another 135,200 are at high risk and 121,000 are at moderate risk.
Experts have long cited an upsurge in unemployment as the main threat to house price growth. This risk became reality with the coronavirus pandemic. Over the seven weeks from mid-March to early May, jobs fell by 7.3%.
Unless employment rapidly recovers, the housing market is facing a major downturn. In one worst-case scenario released by the Commonwealth Bank, house prices could fall by up to 32% over the next two years.
Recent first-time buyers are most vulnerable
Households that can hold on to their homes and weather the storm until the market recovers are not substantially harmed. Established owners, who bought their homes before or early in the boom years, have enjoyed the largest increase in their home values, and the largest reductions in their debt. This puts them in a position of relative resilience to a housing market bust.
In contrast, evidence from the 2008 housing crisis in the United States shows which households are most at risk. These were households that bought their first home with no deposit, or a very low one, in the period leading up to the 2008 crash. The crash left these households “underwater”, trapped with an asset worth less than their mortgage debt. Many defaulted on their mortgages, fuelling the housing market’s downward spiral.
The Australian housing market and financial institutions differ from those in the United States in 2008 in fundamental ways. Still, Australian households that bought their houses at the peak of the boom and have now lost their jobs in the coronavirus pandemic are facing the highest risk.
These include 24,000 recent (2014-5 to 2017-18) first home buyers who borrowed over 80% of the value of their home and were employed in industries where jobs have now collapsed. Another 135,200 recent first home buyers with high loan-to-valuation ratios are also at risk of going “underwater”, with homes worth less than their debt. Many of them are also in precarious employment, irrespective of the pandemic. (These figures do not include first home buyers in 2018-19, for which data are not yet available.)
Many private renters hope a housing downturn will translate into lower rents and perhaps give them a chance to buy their first home in a more affordable market. However, this is not always the case in a downturn. In the US from 2007 to 2009, despite declining house prices, rental affordability stress has only increased.
However, in the longer run, the slowdown in housing construction will create supply shortages, leaving rental vacancies low and rents high. Many landlords, mostly “mum and dad” investors, have taken large loans to finance their property investment. They will need to keep rents high to hold on to their investment properties.
Lower house prices will enable some households to become home owners for the first time, after being locked out of the market during the boom years. These households could benefit from a coronavirus housing bust if the market then recovers. Even so, their gains will do little to change the overall trend of rising inequality made worse by the housing downturn.
We need to flatten out booms and busts
Improved housing affordability is necessary to reduce social and economic inequality. A housing downturn will reduce house prices. But this downturn, when coupled with rising unemployment, will not deliver greater equality, especially if it’s followed by yet another boom.
Australia has flattened the curve of COVID-19 infections. To be successful in reducing inequality, we need to flatten the curve of both booms and busts in the housing market cycle. And only a thorough overhaul of national housing policy will achieve that.
The protests against systemic racism and police violence sweeping the globe highlight the intersection between two pandemics: COVID-19 and racism. Researchers are pointing out that structural inequalities mean people of colour are hit harder by the coronavirus.
Politicians are also concerned the protests may trigger an increase in the spread of COVID-19, so public health experts are providing tips on how to protest safely.
In this week’s roundup of coronavirus stories from scholars across the globe, we explore the disproportionate impact of COVID-19, New Zealand’s success, and the latest on drug trials.
This is our weekly roundup of expert info about the coronavirus.
The Conversation, a not-for-profit group, works with a wide range of academics across its global network. Together we produce evidence-based analysis and insights. The articles are free to read – there is no paywall – and to republish. Keep up to date with the latest research by reading our free newsletter.
Pandemics expose inequality
Past pandemics have exposed existing inequalities, and this one is no different. Our experts explain why COVID-19 is having a greater impact on people of colour and other marginalised groups.
Disproportionate impact. Black Americans have been dying from the coronavirus at nearly three times the rate of white Americans, while black people in the United Kingdom are four times more likely to die from COVID-19 than their white compatriots. Medical historian Mark Honigsbaum writes about the relationship between pandemics and inequality.
Social justice is crucial to healthcare. Systemic racism means marginalised groups have limited access to resources that impact health, according to an interdisciplinary team of US health researchers. Doctors need to be trained to understand the social determinants of health to deal with problems like COVID-19, argue researchers from Rwanda’s University of Global Health Equity.
Safely protesting. Public health experts are concerned the protests will increase the spread of COVID-19. An infection prevention researcher at Monash University gives some tips on how to minimise the risk of transmission when taking to the streets.
“Fear of what others might think when they see a Black man in a mask.”. Despite masks providing increased safety during the pandemic, black and other minority groups are often subjected to racist abuse or discrimination when wearing them. Jasmin Zine of Wilfrid Laurier University explores the racial politics of mask wearing.
A lack of clean water. Clean water is crucial for hygiene and hand washing, key elements of infection control. But many people do not have access to good quality water, especially in slums and refugee camps, according to researchers from the National University of Singapore and the University of Glasgow.
New Zealand eliminates the virus
New Zealand has hit the historic milestone of zero active cases, and lifted almost all its coronavirus restrictions. Two of the leading public health experts behind the successful elimination now explain the challenge of maintaining it. Meanwhile, across the Tasman Sea, experts chart Australia’s journey in controlling the virus.
Cautious celebration. New Zealand has successfully eliminated COVID-19, but elimination is not one point in time: it requires ongoing work. Two public health professors from the University of Otago describe five ways the country can protect itself in the long term.
Asymptomatic cases. Removing coronavirus restrictions in New Zealand increases the chance of a new outbreak to 8%, according to modelling from an interdisciplinary research team. This is because there may be hidden asymptomatic cases that haven’t been uncovered by testing.
Australia’s success. On the other side of the Tasman, Australia’s response has also been one of the most successful in the world. Yet small outbreaks continue to crop up. Steven Duckett and Anika Stobart from the Grattan Institute explain four factors behind the success, and four ways Australia’s response could have been even better.
Testing is key. The success of both New Zealand and Australia is supported by a high number of tests per thousand people, according to a researcher from the University of Sydney, who poured over the worldwide data. Bahrain, Qatar, Lithuania and Denmark are also among the countries with the highest rates of testing per thousand people.
The latest on drug trials, spread, contact tracing
As the world awaits a vaccine that might not arrive, intensive research continues into possible drugs to treat COVID-19. Trials of hydroxychloroquine, the anti-malaria drug spruiked by US President Donald Trump, continue in the face of ongoing controversy.
Study retracted. One study had previously made global headlines after concluding hydroxychloroquine and the related drug chloroquine were associated with an increased risk of death. But the study has been retracted by prestigious medical journal The Lancet because of concerns over the data. Some clinical trials have been paused, while others continue.
The history of clinical trials. The concept of clinical trials might be new to many of us, but they have an ancient history. One of the earliest experiments happened almost 1,000 years ago in China, writes Adrian Esterman from the University of South Australia.
Will it burn out?. The original SARS virus disappeared in 2004. But Connor Bamford, a virologist from Queen’s University Belfast, says COVID-19 is unlikely to do the same because it spreads more easily than SARS. Instead, SARS-CoV-2, the virus that causes COVID-19, might become an endemic virus that settles into the human population.
Contact tracing isn’t new. Contact tracing has been an important tool in controlling COVID-19 in many countries. Two researchers from the University of Glasgow examine the history behind the idea, and how it was used to tackle the bubonic plague 500 years ago.
Development risks. Pregnant women have experienced greater anxiety and depressive symptoms since the start of the pandemic. This could affect the development of foetuses, writes Berthelot Nicolas from the University of Quebec (in French).
The protests that have engulfed American cities in the past week are rooted in decades of frustrations. Racist policing, legal and extra-legal discrimination, exclusion from the major avenues of wealth creation and vicious stereotyping have long histories and endure today.
African Americans have protested against these injustices going back as far as the post-Civil War days in the 1870s. Throughout the 20th century, there were significant uprisings in Chicago (1919), New York City’s Harlem neighbourhood (1935), Detroit (1943) and Los Angeles (1943, 1965, 1992).
And in what became known as the “long, hot summer of 1967”, anger in America’s cities boiled over. The Civil Rights Act of 1964 had ended segregation, but not brought equality. Racial injustice at the hands of police remained. Protesters took to the streets in more than 150 cities, leading to violent clashes between black residents and largely white police forces.
White moderates condemned these armed rebellions as the antithesis of the famed nonviolent protests of civil rights activists. But Martin Luther King, Jr., himself, recognised that the success of nonviolence lay in the ever-present threat of violence.
He noted, too, that riots “do not develop out of thin air.”
Policing practices a trigger for unrest
The trigger for African-American uprisings in the US has almost always been acts by police forces, such as the recent death of George Floyd in Minneapolis.
Sometimes, unrest has broken out when police have refused to act on behalf of black residents. When an African-American teenager drifted into the “white” part of Lake Michigan in Chicago in 1919, for instance, a white man on the banks threw rocks at him and he drowned. A policeman did nothing to stop the assailants, nor did he arrest them.
From the perspective of those targeted and traumatised by police and discriminated against by society at large, property damage and looting were justified.
Such laws and customs were all underpinned by violence, including murder. From the late 1800s until 1950, more than 4,000 African Americans were victims of lynchings. They were so acceptable they were sometimes advertised in the press in advance. These were extra-judicial killings, but often included the police (or they would at least turn a blind eye to the proceedings).
Black Americans who sought better lives in northern cities found racism there, too. White landlords had a captive market in segregated neighbourhoods, such as New York’s Harlem and Chicago’s South Side, which caused them to become increasingly crowded and rundown.
African Americans were often kept out of nicer neighbourhoods in cities nationwide, either through violent acts perpetrated by white residents or even by police officers themselves. The houses of middle-class black Americans in the Birmingham, Alabama, suburb where political activist and philosopher Angela Davis grew up were bombed so often the area was nicknamed “Dynamite Hill”.
Even the presence of black officers in the police forces of northern cities could not alter the fundamentally racist operations of police forces.
The expanding wealth gap
The protests of the 1960s were driven in part by police brutality, but also by the exclusion of African Americans from full civic participation.
Even if African Americans could accumulate the capital to acquire a mortgage, a system of laws known as “redlining” prevented them from purchasing property.
That, in turn, thwarted black families’ efforts to accumulate wealth at the same rate of white families. African Americans lived, therefore, in neighbourhoods that were poorer. Those communities had worse sanitation, no green spaces, grocery stores with high prices and poorly resourced schools.
All the while, it was African Americans who continued to work in low paid domestic and service labour jobs that propped up a booming economy that disproportionately benefited white Americans. It’s no wonder the writer James Baldwin said in 1968,
After all, you’re accusing a captive population who has been robbed of everything of looting. I think [that accusation] is obscene.
The effects of those policies are still in evidence today – and play a significant role in the discrimination and disenfranchisement of many African Americans.
Black families and individuals enjoy a drastically lower median level of wealth than whites or Asian Americans. This is true even among African Americans with high levels of education and high salaries. Generations of discrimination have left their mark as black Americans have been denied the gradual accumulation of largely untaxed wealth in housing and inheritance.
Echoing Baldwin, the comic Trevor Noah observed this week,
If you felt unease watching that Target being looted, try to imagine how it must feel for black Americans when they watch themselves being looted every single day. Police in America are looting black bodies.
The ‘war on crime’ and mass incarcerations
In the wake of the 1967 unrest, federal policies shifted under President Lyndon Johnson from the “War on Poverty” to the “War on Crime”. African Americans were increasingly targeted in the expanding “law and order” and mass incarceration machine.
Today, black Americans, especially men, remain the overwhelming targets for police forces. Young black men are killed by police at a rate of 21 times that of young white men. African American women, too, are vulnerable, as several recent high-profile incidents prove.
All the while, police have been trained and equipped in ways that have blurred the line between civilian police and military forces. The violence of these police forces is becoming more difficult to justify, hence Slate running an article in the last week with the title “Police Erupt in Nationwide Violence”.
As a result, more and more grassroots groups are calling for police forces to be defunded, localised and radically demilitarised. Activists will also continue to remind us that black lives matter.
Health inequality was a major concern of 20th century social democrats in countries ranging from Britain to Sweden.
During the current coronavirus crisis, it has once again become one of the most crucial issues that social democrats need to address.
Coronavirus itself does not discriminate in terms of class. Indeed, those with the financial means to travel have often been among the first victims. More men than women appear to be dying of it.
Nonetheless, what a difference your position in the social hierarchy can make.
Access to excellent and affordable health care obviously remains a key issue, even allowing for the fact the wealthy may also fail to have access to ventilators in the current crisis. Years of neoliberal cutbacks have undermined the formerly good public health systems that social democrats established from the 1940s.
Years of wage stagnation and the growth of precarious work have also resulted in rising economic inequality. This has made it impossible for many workers to build up a financial buffer for hard times and seriously limited their ability to stock up with food and medicines.
Some poorly paid workers cannot afford not to turn up to work even when they have possible symptoms. Others are continuing to work in jobs that put them at risk.
The economically vulnerable are also less likely to be able to afford the technology to enable people to work from home or help children study while schools are closed. Similarly, it is harder for them to buy in food or other services.
Women are disproportionately affected, too
Women may have a lower mortality rate than men, but have often been in a weaker financial position due to wage disparities and precarious and part-time work. In many countries, these factors can also reduce the payments women are entitled to if they become unemployed due to the pandemic.
At the same time, women’s (gendered) carer responsibilities will have massively increased. Many are working in industries, such as aged care or health care, with an increased exposure risk. Some are now restricted to home with abusive partners.
Consequently, health professionals have emphasised the importance of having a gendered analysis of the impacts of the pandemic. Similar calls have been made in countries ranging from the US to India.
Bizarrely, conspiracy theories are now appearing suggesting the coronavirus is divine punishment for increased gender and same-sex equality. It is apparently all the fault of “gender theory”.
The perils of globalisation
The list of COVID-19 scapegoats is a long one. Various racial and ethnic groups were among the first to experience virus-related discrimination.
Many racial and ethnic groups are also often in an economically vulnerable position, which then exacerbates their existing problems during a pandemic. Remote Indigenous communities are particularly at risk.
Doctors are having to make difficult choices about who gets access to scarce medical equipment. The elderly are at particular risk of being denied treatment in some countries. Older citizens are more prone to dying as a result of the virus, but there are suggestions ageism could be a factor, too.
Meanwhile, the perils of globalisation are becoming clear as global supply chains of crucial medical equipment, chemicals and food are disrupted. Countries are discovering they can no longer manufacture the essential products they need, including medical ones.
Major pharmaceutical and other companies are among those racing to develop treatments and vaccines. But will cheap, generic versions be publicly available or will they be subject to restrictive patents and price gouging?
After all, there are claims the shortage of ventilators in countries such as the US is partly due to firms prioritising producing more expensive and highly profitable models over cheaper, basic ones. Bidding wars for scarce ventilators are already breaking out.
A return to social democracy?
Given the market is not coping and the need for government to intervene is more apparent than ever, one might think the time for social democracy has come again.
Some countries, such as Sweden, are indeed evoking social democratic values of solidarity and caring for others. Controversially, the Swedish government may believe those values are so strong that stricter lockdown provisions are not required to enforce community compliance.
Other social democratic countries such as Denmark were among the first to introduce forms of wage support for those thrown out of work.
However, in a time when even conservative governments in countries such as Germany, Britain and Australia are abandoning neoliberal strictures on fiscal restraint to throw billions at the pandemic and their collapsing economies, the need for social democratic governments may not be as apparent as before.
Furthermore, social democratic governments face the same impossible challenges as conservative ones.
In my recent book on social democracy and equality, I argued that one of the main aims of social democratic governments was to make citizens feel secure and less fearful. Providing good publicly available health services and income support for the sick and unemployed was an important part of this.
But how can any government or political party make people feel secure or less fearful in a pandemic and economic disaster of this scale? This is a once-in-a-hundred-year crisis that could exacerbate xenophobia, as well as existing domestic social and economic divisions.
Consequently, the challenge for social democrats is that issues they would normally address may instead be taken up by their mainstream conservative opponents or those on the far right.
During the conference The Conversation will publish a selection of pieces written by the authors of papers to be delivered at the conference.
Since the surprise re-election of the Coalition, there has been renewed debate about the role the “aspirational” Australian played in the final outcome. The debate is taking place against the backdrop where income inequality has been growing in most developed countries over the past half-, including in Australia.
Bureau of Statistics figures released on Friday show that the wealth of Australia’s wealthiest households has grown much faster than the wealth of the rest.
Household net worth by quintile (top fifth to bottom fifth)
Over the course of the 20th century, income equality has been U-shaped, a point noted by French economist Thomas Piketty and Australia’s Productivity Commission.
In Australia, the income share of the top 1 per cent peaked at 14% in 1950, then fell to a low of 5% in the early 1980s before climbing again to 9% by 2015.
Wealth inequality has also followed a long term U-pattern, and in many countries wealth is even more concentrated than income.
The Productivity Commission finds that in Australia, a person at in the top 10% of wealth distribution has 40 times as much wealth as a person in the bottom 10%. That person has four times as much income.
Income shares of the top 1%, by country
In a paper to be presented to the Australian Conference of Economists in Melbourne on Tuesday, my colleague Monica Jurin and I shed light on wealth inequality over the past three decades through the lens of Australia’s super rich – the richest 200 households and families.
The super rich are changing
Based on the Rich List, compiled by the Business Review Weekly since the 1980s, and now updated annually by the Australian Financial Review, we examine the importance of inherited wealth versus entrepreneurship among Australia’s super rich.
The Rich List confirms the rise in wealth inequality. In 2019, the richest 200 families accounted for 3.6% of the aggregate net worth of all Australian families, up significantly from 2.3% in 1989.
But the importance of inherited wealth appears to have diminished.
Those with inherited wealth and family businesses today make up one-third of the super rich, well below 43% in 1989, with a gradual decline over each of the past three decades. Inherited wealth by itself accounts for 37% of the Rich List’s net worth today, well below 55% in 1989.
Today, the technology sector accounts for almost 8% of the Rich List’s net worth, compared to almost none in 1989.
The results seem somewhat less egalitarian when we examine whether those on the list have appeared on it before.
They’ve more persistence, less inheritance
For instance Frank Lowy, co-founder of Westfield, is considered to be self made. But once on the list, he remained on in each of the four decades we examined.
Whatever the sources of one’s entry to the Rich List, members like Mr Lowy provide evidence of persistence. Conditional on being on the list a decade earlier, members have a slightly higher probability of remaining on it than they did in 1999, controlling for death and other factors.
They find that inherited wealth has become less important and being college educated has become more important.
In Australia we find that a substantially higher share of the richest individuals are tertiary qualified today than they were in 1989, but we are reluctant to draw strong conclusions because the entire society has greater access to tertiary education than it did in 1989.
The super rich have occupied a unique place in modern Australian culture since the emergence of conspicuous entrepreneurs and the emergence of the Rich List in the 1980s.
They are changing, and probably in a good way, even as inequality is growing.
Rising inequality is a concern across the developed economies, including Australia where top earners’ pay has soared to a 17-year high while ordinary workers’ wage growth has been the lowest on record. And that’s ultimately bad news for economic growth. This is longer than the usual Conversation article, so allow some time to read and enjoy.
In the last decade or more, economic growth has slowed across the Western world, although a belated though weak recovery has been under way since around 2017. In the US, for example, growth in gross output per capita averages around 1% a year this century. That’s about half the average rate during the second half of the 20th century.
American economist Arthur Okun famously argued there was a trade-off between equality and economic efficiency, implying little chance of high inequality and sluggish economic growth occurring together. Yet this is exactly what is happening in the US. What has gone wrong?
In The Captured Economy, Brink Lindsey and Steven Teles explore US economic sectors such as finance, land use, occupational licensing and intellectual property rights. They argue powerful interests have captured these sectors and are using the state to distort markets to their advantage. This kind of rent-seeking is weakening growth and driving up inequality. As the authors put it:
Across a number of sectors, the US economy has become less open to competition and more clogged by insider-protecting deals … Those deals make our economy less dynamic and innovative, leading to slower economic growth … At the same time, they redistribute income and wealth upwards to elites in a position to exploit the political system to their favour.
This special dealing is but one facet of a much wider problem of competing claims for economic resources increasingly damaging Western economies. The arguments by Lindsey and Teles concern dysfunctions on the supply side of the economy.
In our recent book, Fair Share: Competing Claims and Australia’s Economic Future, Michael Keating and I argue that even bigger competing claims and distributional problems are now affecting the demand side of Western economies. These problems are also producing weak economic growth and rising inequality.
But how are these two outcomes connected? In Fair Share, we argue that rising inequality is weakening economic growth across the advanced economies by reducing aggregate demand. Our account differs from mainstream economics, which argues that growth stems mainly from the supply side of the economy.
In recent decades many neoliberal, supply-side policies have been implemented. The recent sluggish pattern of growth calls the supply-side theory into question. Indeed, the gap between theory and reality has prompted former US treasury secretary Lawrence Summers to argue that “the events of the last decade should precipitate a crisis in the field of macroeconomics”.
Even more important has been the rise in income inequality. The wage increases that have occurred have been largely concentrated among the top income earners. These “winners” have a lower propensity to consume than those in the lower deciles of earnings distribution. As a result, too much income inequality and slow wages growth relative to productivity growth risk a continuing shortfall in demand and hence weaker economic growth.
Prior to the Global Financial Crisis (GFC), many economic policies sought to avoid this shortfall in aggregate demand. This did so either by maintaining a very competitive exchange rate to support export-led growth (e.g. China, Germany) or, more often, by increasing the availability of consumer credit to support consumer demand (e.g. the US, UK).
Neither of these strategies has proved viable in the longer run. First, not all countries can be net exporters at the same time. Second, the required growth in consumer credit became increasingly risky, and eventually helped fuel the GFC.
Since then, the advanced economies have experienced protracted stagnation and a weak recovery due to a shortfall in aggregate demand. The longer this shortfall continues, the greater the risk that the rate of increase in potential output will also slow.
The impact on economic output is due to lack of new investment, on which technological progress depends, and atrophying of workforce skills when labour is not fully employed. Indeed, the combination of low unemployment and slow economic growth suggests this slowdown in potential output growth is already occurring in the US.
More generally, however, competing economic claims can potentially deliver various combinations of inflation, wage stagnation, growing inequality, weak demand and slower economic growth. Our central proposition in Fair Share links income distribution and economic growth.
Why growth depends on balanced distribution
Western capitalism has always run on a fairly narrow distributional path. If the distributional balance gets too far out of kilter in either direction the threats of inadequate aggregate demand and weak growth are likely to emerge.
As we saw in the 1970s, pursuit of excessive wage increases risks stagflation, resulting in inadequate investment and rising unemployment. On the other hand, and as is happening now, a significant shift towards wage stagnation and increased income inequality risks slower growth through inadequate demand and consumption.
Hence, it is the distributional shifts, in pursuit of higher wages in the 1970s and more recently in favour of capital and the highest-income groups, that have largely been responsible for the difficulties in both epochs in maintaining growth in the advanced capitalist economies.
Our theory thus suggests that the problems of stagflation in the 1970s were not as far removed from today’s problems as one might think. The root cause of the problems across both eras has essentially been distributional changes.
Some analysts argue that regulatory and other changes have altered the relative power of those involved in competing claims, with workers and wage levels, in particular, losing out. Others, such as Lindsay and Teles, argue returns are skewed by oligopolistic competition, rent-seeking and other forms of market power and powerlessness (see also Cameron Murray and Paul Frijters’ Games of Mates on Australia).
We acknowledge both of these changes but argue that the biggest changes in income distribution have come from technological changes that have hollowed out middle-income jobs, while any relative labour shortages have tended to be skill-biased. These two factors are the main drivers of increased income polarisation.
Furthermore, to the extent that trade-union power matters, we think changes in the industrial and occupational structure of the workforce, in response to technological change, have largely been responsible for reduced trade union membership and the loss of bargaining power.
What should governments do about this?
In response, governments should aim to boost wages and redress growing income inequality. Any such strategy will be most effective if it focuses on responding to the technological changes that are the prime cause of rising inequality. As Thomas Piketty concluded in the most significant analysis of inequality published this century:
To sum up: the best way to increase wages and reduce wage inequalities in the long run is to invest in education and skills.
We argue therefore that education and training need to be boosted to help workers cope with changing markets and job opportunities. This approach can be expected to boost both aggregate demand and supply. Direct measures to boost lower incomes may also be needed to improve the social safety net for those who miss out.
More generally, the successful continuation of the open-economy model, and indeed the sustainability of capitalist democracy, will depend upon the successful resolution of competing claims. In particular, this requires a fair sharing of the gains from increased economic production and a tight link between wages and productivity growth.
It is certainly clear that the supply-side, neoliberal policies of recent decades have largely run their course in many advanced economies. Too often the starting premise of the supply-side agenda is that the role of government should be minimised through further deregulation and tax cuts. However, the nature of many of today’s problems requires government to be more interventionist rather than less, while still maintaining the key strengths of an open, liberal, market economy.
The new focus of policy must be on the demand side. The failure to reasonably share income and educational opportunities is creating a highly volatile mix of unhappy “losers”. Hence, we see a growing political backlash, the rise of right-wing populism and extremism, Brexit, Trump etc.
The backlash against globalisation and economic restructuring is real and growing. It poses a threat to economic development and to liberal democratic capitalism.
All this has led commentators such as German sociologist Wolfgang Streeck to refer to “the crises of democratic capitalism”, featuring “an endemic and essentially irreconcilable conflict between capitalist markets and democratic politics”. Perhaps so, yet capitalist democracies have managed to do much better in the past, especially during the post-war golden age of the 1950s and 1960s.
What does this mean for Australia?
Even today some countries are handling the situation better than others, suggesting politics and policies can make a difference.
Australia is a case in point. In recent decades reforms to improve market flexibility in Australia have underpinned one of the longest expansions in capitalist history. At the same time the wage share in Australia in 2015 was about the same as in 1990 and a bit higher than in 1960.
In addition, Australia has possibly the most efficient redistributive system of all the advanced economies. Under the Hawke and Keating Labor governments’ Accord with the trade unions, the social wage increased substantially faster than other incomes.
Thus, it is imperative for Australia that it adopts a more growth-oriented income distribution. Key elements include wage-supporting measures and ensuring people are better equipped to change the organisation of existing jobs and, in many cases, move to the higher-skilled and well-paid jobs that technology is often creating.
A new agenda is needed. We have to recognise that economic growth inevitably involves economic transformation, based on innovation and technological change. Thus, contrary to the assumptions many economists make, it is highly probable that economic growth will impact on the distribution of incomes. This of itself can create future problems for the sustainability of that growth.
The bottom line, economically and politically, is that governments need to be prepared to promote demand as well as supply. Increasingly, we can no longer escape the distributional issues at hand. The winners will need to help the losers through more effective support and a degree of redistribution – especially if things get worse through ongoing wage stagnation and rising resistance to the perceived inequities of the present economic system.
Income inequality has dropped slightly in Australia, largely driven by a fall in incomes for the richest 20% of the population, according to the latest Australian Bureau of Statistics (ABS) Survey of Household Income and Wealth.
The richest 20% of the population have seen their real disposable incomes (adjusted for the number of people living in the household) fall by nearly 5%, or close to A$100 per week. Most other households have seen no real increase in their incomes over the two years since the previous survey was released.
Our recent public debate over whether inequality is rising or falling ran into the problem that the two most important sources of data were showing different trends. The ABS survey continues to show a higher level of income inequality than the HILDA survey, but the latest trends now look more similar.
Possibly the best characterisation of the latest ABS figures is that they show inequality remains higher than at any period before 2007-08, but in the short term it is unclear what to expect.
As you can see in the following chart, there has been a slight fall in income inequality between 2013-14 and 2015-16, with the Gini coefficient for “Equivalised Disposable Household Income” falling from 0.333 to 0.323. The Gini coefficient is a measure between zero (where all households have the same income) and one (where only one household claims all the income).
Equivalised Disposable Household Income is the total income of the household from all sources including social security payments, minus direct taxes, and then adjusted for the number of people living in the household. For example, a household of a couple with two children under the age of 15 is assumed to need 2.1 times the income of a household of a single adult to achieve the same standard of living.
So what explains these most recent trends? At this stage, it’s difficult to be definitive. It should also be borne in mind that it has only been two years since the last survey, the overall change is not large, and so we should be cautious in unpacking the trends.
But it is worth noting that this small reduction in income inequality has come at the same time as a small fall in both median and mean disposable incomes for Australian households.
The average taxes paid by households have also risen slightly in real terms (adjusted for inflation) since 2013-14, while the average social security benefits have stayed the same in real terms. This masks a significant drop in the real level of family payments (such as the family tax benefit) received by households, and increases in age pensions and “other payments” (overseas pensions and benefits, partner allowance, sickness allowance, special benefit, war widow pension (DVA), widow allowance, and wife pensions etc.).
However, where there does appear to be large changes are in the sources of income for households. If we compare incomes between the 2013-14 and 2015-16 surveys, we find that the only group that has enjoyed real increases in incomes are those whose main source of income is social security benefits. But these have risen by only A$6 per week, or about 1.3%, and they remain by far the lowest income households in Australia, with their average incomes remaining less than half of all other household groups.
Households who mainly rely on wages and salaries have seen their average real disposable incomes fall by about A$17 per week, or about 1.4%.
The biggest declines are among those who mainly rely on self-employment income from unincorporated businesses – usually a small business which has not incorporated as a registered company – and people whose main source of income is “other”.
“Other” includes many things, such as income received as a result of ownership of financial assets (interest, dividends), and of non-financial assets (rent, royalties), as well as from sources such as incorporated business income (i.e. companies), superannuation, child support, workers’ compensation and scholarships.
This group is fairly small – about 8% of households, but they are both the group with the highest and most unequal incomes and by far the highest level of net worth (assets minus liabilities). Their average incomes have fallen by around A$93 a week in real terms, or around 8%, but their median real incomes rose by around A$11 per week, suggesting that the loss in income was concentrated among higher income households in this group.
This group in 2013-14 had by far the highest level of income inequality with a Gini coefficient of 0.474. This has fallen to 0.423 in 2015-16. But because a lot of this income comes from the stockmarket, we can expect it to be more volatile.
The group who appear to have lost by far the most, however, are households whose main source of income is unincorporated business income. This is an even smaller group – around 4.6% of all households in 2015-16. Their real average incomes have fallen by more than A$160 per week, or around 16%. They also have a high level of inequality within their group, with a Gini coefficient of 0.353 in 2015-16, down from 0.389 two years previously.
But the overall change in income inequality is not large, and it does not significantly change Australia’s international ranking.
Writing in the Australian yesterday, Nick Cater of the Menzies Research Centre asserted that Australia is “one of the most equal and socially mobile nations on earth”. But even with the slight reduction in inequality, we are slightly above the OECD average, and there are around 20 OECD countries who are likely to have lower levels of income inequality than Australia.
Overall, the data shows a relatively small change in incomes for employee households and for households whose main source of income is social security payments. Together, these account for 87% of all households in Australia.
The reduction in overall income inequality in this period is therefore explained by the falls in income for the self-employed and for the “other” group – the group with the highest incomes and wealth.
Understanding what exactly has been happening for these groups and why will require further time and analysis. The volatility of the income sources for these groups is another reason to be cautious about projecting future trends.
Recent commentary on levels of inequality exposes the myth that Australia is an egalitarian society in which the privileges of birth have little currency.
Focusing on inequality in the distribution of incomes ignores an equally important dimension of inequality: wealth. Wealth is much more unequally distributed than income. Therefore, ignoring wealth inequality skews perceptions of social inequality.
Perceptions of the levels of income and wealth inequality are derived from our day-to-day experiences. This means that not mixing with people from the other end of the wealth distribution can colour our perceptions of inequality.
The lack of official data on the wealth holdings of Australians hampers research into trends in wealth inequality. Between 1915 and 2003-04, there is almost no official wealth data to examine.
In 2003-04, the wealthiest 20% of Australian households held 58.6% of total household wealth, and the poorest 20% of households held just 1.4% of total household wealth. In 2013-14, the wealthiest 20% of households held 61% of total household wealth, and the poorest 20% of households held just 1% of total household wealth.
These figures indicate that wealth inequality increased over the decade to 2013-14.
The table below details trends over time in various measures of wealth inequality. The P90 to P10 ratio compares the wealth of households at the 90th percentile with that of households at the tenth percentile. A larger ratio indicates greater levels of inequality.
In 2003-04, households at the 90th percentile held 45 times as much wealth as households at the tenth percentile. In 2013-14, households at the 90th percentile of the distribution held 52 times as much wealth as households at the tenth percentile. This indicates that wealth inequality increased in that decade.
Using the mean and median household wealth figures, it is possible to calculate the ratio of median to mean wealth.
The closer this ratio is to one, the lower the level of inequality. In 2003-04, the ratio was 0.63. In 2013-14, it was 0.57. This also indicates that wealth inequality increased.
The distribution of household wealth also varies between Australia’s state and territories, and by location within states and territories.
Households in the ACT recorded the highest mean household wealth (A$890,100). Households in Tasmania recorded the lowest mean household wealth ($595,600).
When these figures are disaggregated by location into capital city households and households located in the rest of the state, the largest wealth gap occurs in New South Wales. The mean wealth of households in Sydney was $971,700, whereas the mean wealth of households in the rest of NSW was $534,700.
The median-to-mean-wealth ratios show wealth was most unequally distributed in Brisbane and Perth.
Forbes’ lists of billionaires (in $US) show that the number of billionaires living in Australia increased from two to 26 between 1987 and 2014.
Having an increasing number of billionaires would not be an issue if all Australians’ wealth was increasing at a similar rate. However, if the gap between the wealth of the billionaires and that of the average residents increases dramatically, there is likely to be discontent.
A world where a few people have most of the wealth motivates others who are poor to strive to earn more. And when they do, they’ll invest in businesses and other areas of the economy. That’s the argument for inequality. But it’s wrong.
Our study of 21 OECD countries over more than a 100 years shows income inequality actually restricts people from earning more, educating themselves and becoming entrepreneurs. That flows on to businesses who in turn invest less in things like plant and equipment.
Inequality makes it harder for economies to benefit from innovation. However, if people have access to credit or the money to move up, it can offset this effect.
We measured the impact of this by looking at the number of patents for new inventions and then also looking at the Gini coefficient and the income share of the top 10%. The Gini coefficient is a measure of the distribution of income or wealth within a nation.
How inequality reduces innovation
From 1870 to 1977, inequality measured by the Gini coefficient fell by about 40%. During this time people actually got more innovative and productivity increased, incomes also increased.
But inequality has increased in recent decades and it’s having the opposite effect.
Inequality also means the market for new goods shrinks. One study shows that if incomes are more equal among people, people who are less well off, buy more. Having this larger market for new products, incentivises companies to create new things to sell.
If wealth is concentrated among only a small group of people, it actually increases demand for imported luxuries and handmade products. In contrast to this, distributed incomes means more mass produced goods are manufactured.
What’s been driving inequality since the 1980s is changes to economies – countries trading more with each other and advances in technology. As this happens old products and industries fade while new ones take their place.
These changes have delivered significant net benefits to society. Reducing trade and innovation will only make everyone poorer.
The declining number of people in unions has also contributed to inequality, as workers lose collective bargaining power and some rights. At the same time, unions can adversely affect innovation within firms.
Unions discourage innovation when they resist the adoption of new technology in the workplace. Also if innovation creates profits for firms but some of these are taken up by higher wages (lobbied for by unions), these reduced profits provide less incentive for firms to innovate.
Where workers’ jobs are protected, for example with union membership, there’s often less resistance to innovation and technological change.
Giving people access to credit could change this
Most countries have much higher levels of inequality than the OECD average. This combination of high inequality and low financial development is a major obstacle to economic prosperity.
When financial markets work well, everyone gets access to the amount of credit they can afford and can invest as much as they need. We found that for a nation with a credit-to-GDP ratio of more than 108%, low income earners are less discouraged by not having a share of the wealth. There’s less of a dampening affect on innovation.
Unfortunately, most countries (including many in the OECD) are far from this threshold. In 2016, the credit-to-GDP ratio averaged 56% across all countries, and only 28% for the least developed. Until 2005, Australia was also below this threshold.
This means governments should look at providing more people with more access to credit, especially to the poor, to stimulate growth.
For financially developed nations like Australia, increased inequality actually has less of an effect on innovation and growth. So tackling inequality might not be as easy as increasing access to credit.
Spending and taxing are already historically high and growing inequality makes it harder to further raise taxes. Countries like Australia are not unequal societies in the sense of having significant barriers to people improving their income.
Australia is a relatively egalitarian nation. In 2016, the top 1% owned 22% of the wealth in Australia, compared to 42% in the USA, and 74% in Russia.
Governments in more developed nations can instead try to maintain a stable financial sector to improve growth or by training and education.