Battlers & billionaires

Australian egalitarianism under threat
Andrew Leigh

In 2002, two bombs exploded in Bali nightclubs, killing and injurin­­­­­g hundreds of people. At the local hospital, there was a shortage of painkillers. Graeme Southwick, an Australian doctor on duty, asked patients to assess their own pain levels. He kept being told by patients in the ‘Australian’ ward that they were okay – the person next to them was suffering more.

Coming across this account, historian John Hirst was reminded of the description of injured Australians in Gallipoli nearly a century earlier. He quotes the official war historian Charles Bean, who describes the suffering and then says, ‘Yet the men never showed better than in these difficulties. The lightly hurt were full of thought for the severely wounded.’[1] 

Even in the midst of their own pain, the first instinct of many Australians was to think of those worse off than themselves.Even the military, one of our most hierarchical institutions, is infused with the nation’s egalitarian spirit. Indeed, it has been suggested that this is one reason why our forces are such effective peacekeepers. When the United Nations intervened in Somalia in the 1990s, our troops were more inclined to go on foot patrols than the French and American forces, who tended to stay in jeeps and behind sandbags.

As a result, our troops were more likely to listen to local townspeople rather than just hearing the views of tribal leaders. This in turn made them more effective at solving local disputes. It was, as one account put it, ‘an example of the traditional Australian sympathy for the underdog being put to very good use’.[2]

Egalitarianism goes deep in the Australian character. Most of us do not like tipping. There are no private areas on our beaches. Audiences do not stand when the prime minister enters the room. We are a country that – until Tony Abbott’s recent monarchical revival – had happily dispensed with knighthoods, choosing the inclusive ‘mate’ over the exclusive ‘sir’. In Australia, it is quite normal to sit in the front seat of a taxi. If the plumber drops around, Australians offer a cuppa. One of our billionaires is ‘Twiggy’ and past Australian senior bankers include ‘Nugget’ and ‘Nobby’. Egalitarianism is as much a part of Australia’s national identity as vegemite, Uluru and the Big Banana.

Egalitarianism under threat

Despite playing a central role in our common way of life, this egalitarian ethos is increasingly under threat. After a generation of rising inequality, gaps are emerging within our communities. A relatively egalitarian society is gradually being supplanted by one where the billionaires enjoy lives far removed from the daily experience of the battlers.

This inequality comes into sharp focus if we consider just a few figures. For example, since 1975 real wages for Australians in the bottom tenth wage bracket have risen 15 per cent, while wages for those in the top tenth have risen 59 per cent.[3] To put that in dollar terms, if cleaners and checkout operators had enjoyed the same rate of wage growth as financial dealers and anaesthetists, these low-wage Australian workers would have an extra $14,000 a year in their pay packets today.

Over the past few decades, there has been a rise in the share of people living on less than half the median household income – a rise in relative poverty. At the same time, the income share of the top 1 percent of Australians has doubled. The income share of the top 0.1 percent has tripled. Altogether, the increase in the affluent share over the past three decades represents a $403 billion shift from the bottom 99 per cent to the top 1 per cent.[4]

Under the Rudd and Gillard Governments, inequality did not rise. But income inequality today remains significantly higher than it was in the 1970s. The same holds for wealth. The top 1 per cent of Australians now have a larger share of wealth than in the 1970s. The wealth share of the top 100,000th of the population - approximately the top 200 people - has tripled since the mid-1980s. In 2013, I estimated that the richest 50 people had more wealth than the poorest one million while, the richest three people in Australia had more wealth than the poorest one million.[5]

Even if we had no access to earnings figures, income surveys or wealth statistics, it would be clear that inequality is rising just by considering Australians’ consumption patterns. The past decade saw a 70 per cent increase in annual Porsche sales, and a fivefold increase in sales of Maserati sports cars.[6] The number of helicopters in Australia has more than doubled, while the size of our private jet fleet has almost tripled.[7] At the same time, one in five Australians cannot afford a week’s holiday away from home each year, one in eight cannot afford dental treatment and one in 20 cannot afford Christmas presents for friends and family.

It is critical that we take note of these trends and what they have to say about inequality in Australia. We need to talk about the impact of that inequality on our shared values, our social fabric and the lives of individual Australians. If we do not, there is a real risk that we will sleepwalk into a more unequal Australia without realising what is being lost.

What drives inequality?

The rise of inequality over the past generation has several causes. Technology and globalisation have combined to turn those who would once have been mere ‘stars’ into what economists call ‘superstars’.

Take the law profession, for example. In the 1980s, many firms were city-based and the fax machine was the hottest technological innovation. Consequently, the best lawyer in a large Sydney firm would service the most profitable Sydney clients. By the 1990s, national partnerships were common: airfares had fallen, while email and mobile phones allowed rapid communication. This allowed the top Sydney partners to move towards servicing the top Australian clients, regardless of their location. Since the 2000s, with the rise of international partnerships and the ubiquity of videoconferencing, a senior Sydney partner is now likely to be working for major clients across the entire Asia-Pacific region. So it is hardly a surprise that they would be earning more than ever before.[8]

The globalisation of Australia’s CEO market is another example of superstar labour markets at work. One of the first overseas CEOs was Bob Joss, brought in to head Westpac in 1993 on an annual salary nearly as large as those of the other three major bank CEOs combined. Since then, average earnings of ASX 100 CEOs have risen from $1 million (seventeen times the average Australian salary) to $3 million (forty-two times the average salary).[9]

These salaries keep rising because companies seeking global talent are loathe to give their CEOs remuneration packages which are less generous than those awarded to other CEOs. In one study, only one in twenty firms said they would give their CEO a remuneration package below the median.[10] To be clear – only one in twenty firms want to pay their CEO a remuneration package less than half their competitors. In Garrison Keillor’s Lake Wobegon, all the children were above average. It is a strange world indeed when all the CEOs have to be above average.

Another significant driver of inequality has been the decline of unions. The trade union movement has been a  powerful force for equality in Australia, and while it has become fashionable lately to deride their influence in politics and public life, no serious economist could doubt their role in reducing earnings inequality. 

Unions have typically focused on raising the earnings of the lowest paid, and have worked to reduce pay gaps across industries. The campaigns for a forty hour work-week and four weeks annual leave – along with the ongoing drive for equal wages for women – have all been spearheaded by unions. If union density had not fallen from half the workforce in the early-1980s to less than one-fifth today, Australia would likely be a more equal place.[11]

Technology, globalisation and de-unionisation have fundamentally altered much about how communities live, work and organise themselves. While the changes wrought by these trends have undoubtedly been beneficial for some, they have also played a significant role in making Australia more unequal.  

Why does inequality matter?

There are undoubtedly some people who will ask: if all boats are rising, why does it matter if the tugboats are rising more slowly than the ocean liners? Prime Minister Tony Abbott once summed up this perspective by saying: ‘in the end we have to be a productive and competitive society and greater inequality might be inevitable’. In his view, Australia must accept becoming less equal as the price of competing with the world.

What’s wrong with that view? One answer is that Australians simply do not want to live like that. In fact, surveys indicate that people have a preference for a much more egalitarian society than we have today. In one study, people were asked to imagine that they had an equal chance of being born into Here’s one way to think about inequality. Suppose you had an equal chance of being born into any of the five wealth quintiles in Australia. Would you prefer to be born into a society where the poorest fifth had 1 per cent and the richest fifth had 62 per cent of the wealth? Or a society where the bottom had 15 per cent and the top had 24 per cent?

The first set of numbers is the actual distribution of wealth in Australia. But when surveyed about their ideal distribution, the majority of respondents wanted the nation to be more egalitarian than it is today, not less. Indeed, the second set of figures is the preference of the most affluent. Mr Abbott is right that productivity matters. But he is wrong to think that more inequality is the only way to achieve it.

Another concern about inequality is that societies with a large gulf separating the haves and have-nots are those in which few people escape the circumstances of their birth. Think of a ladder. If inequality measures the gaps between the rungs, then intergenerational mobility measures how easy it is to climb up or down. If the rungs move wider apart, the ladder becomes harder for someone to climb. In a very unequal society, people have little prospect of ever moving off their birth rung.

In Australia, income mobility across generations is worse than in Scandinavia, but better than in the United States. One way of thinking about the difference is to compare the hereditability of income with the hereditability of height. In the United States, the hereditability of income is similar to the hereditability of height.[12] That is, a person’s height and their income are both highly determined by those of their parents. In Australia, the effect is only half as large. But in in countries such as Sweden and Denmark, the hereditability of income is smaller still.

The more unequal we become, the more that a parent’s income will determine where their child ends up in life. The idea that your parents could have as much effect on your earnings as they do on your height is a prospect which should worry even the most conservative among us. This proposition certainly worried Adam Smith, the forefather of modern economics. He argued: ‘This disposition to admire, and almost to worship, the rich and the powerful, and to despise, or, at least, to neglect persons of poor and mean condition … is … the great and most universal cause of the corruption of our moral sentiments.’

Adam Smith believed it was only fair that everyone should get a share of the national wealth, that schooling be free, and taxation be progressive. These are the kind of critical measures which ensure that some people are not left languishing on very low rungs of the social ladder simply because that’s where they were born.

What can governments do about inequality?

 Forces such as technological change and globalisation powerfully affect the income gap in Australia. But government is not a life-raft in a storm-tossed sea. The decisions that governments make can affect the distribution of income – for better or for worse.

For example, the Rudd government’s decision in 2009 to boost the single age pension by over $1600 a year reduced relative poverty by one-fifth. Initiatives such as the Gonski schools funding plan were also aimed at distributing resources more fairly to improve outcomes for those in disadvantaged areas – ensuring postcodes did not define the destiny of Australian schoolkids.   

By contrast, the Abbott Government’s first budget contained many policies that would lead to Australia becoming a more unequal country. For example, proposed changes to the NewStart Allowance would see unemployed young Australians left without income for up to six months, forcing many to rely on family or charity to meet their daily needs. Plans to apply interest rates to student loans could likewise place tertiary study beyond the reach of many kids from poor backgrounds. The proposal to index pensions to prices rather than wages sends a curt message to pensioners: you will no longer share in any increase in living standards. Labor opposed all of these measures because they eat away at the foundations of an egalitarian society.

At the same time as introducing these unfair measures, the Abbott government has pursued policies which benefit the most affluent. It is working to repeal the mining tax, which would benefit some of the richest people on the planet. The government has also maintained extremely generous tax concessions for people with more than $2 million in superannuation. These retirees receive more government assistance than someone on the full pension. Indeed, someone with $20 million in superannuation is receiving nearly half a million dollars a year in government support. In the very same budget, the government attempted to cut the Low Income Super Contribution scheme which helps those with limited incomes save for their retirement. So while the Abbott government was fighting for lower taxes on people with more than $2 million in their superannuation accounts, its senior members were also fighting for higher superannuation taxes on people earning less than $37,000 a year. The Abbott government is strong when it comes to taking on the weak, but weak when it comes to standing up to the strong.  

In 2013, the Abbott government said that it would scrap 55 tax measures that Labor had introduced. By my own analysis, not one of these changes would benefit people in Blacktown more than residents of Balmoral. In the end, every extra loophole left open in the tax system just means that others have to pay higher rates of tax. Perhaps Milton Friedman had loopholes like this in mind when he pointed out that ‘to spend is to tax’.

As though it wasn’t enough to cut benefits for the most disadvantaged and cut taxes for the most affluent, the Abbott government has gone one step further, by proposing to transform Australia’s flat-rate paid parental leave scheme into a wage replacement scheme. The effect of this is that a high-wage family will get $50,000 when they have a child, while a low-wage family will get $16,000. Regardless of one’s political views, how is it fair or justifiable for a baby born into a high-earning household to receive nearly five times as much government support as a baby in a low-earning one?

Looking beyond the home and into the workplace, the picture is no prettier. The government is cutting pay for the men and women who clean the Prime Minister’s suite, and reducing entitlements for those who answer the phones at federal departments like Centrelink. It is also making life more difficult for unions through a politically-motivated Royal Commission, and by making collective bargaining harder. These attacks are hardly surprising, given that unions are the strongest and most vocal advocates for equality within the workplace.  

When governments fail to address inequality – or  worse, adopt policies that exacerbate it – it becomes harder for our society to achieve other important goals as well. Women, people with disabilities and Indigenous Australians are overrepresented at the bottom of the income distribution. This means that a widening income gap also exacerbates the gender pay gap and makes achieving parity of outcomes between Indigenous and non-Indigenous Australians an ever more distant dream. In other words, if we care about Indigenous and gender-based disadvantage, then we must address the broader question of inequality as a fundamental part of any government solution.

While the Abbott government may claim to have a Closing the Gap Indigenous policy, it’ll be harder to achieve if they have a Widen the Gap economic policy.

Labor and inequality

While it is easy to critique the Abbott government for policies which will make Australia less equal, it is vital that the Labor Party thinks deeply about inequality too. For many years, it seemed as though talking about inequality was taboo for parliamentarians on the progressive side, but thankfully this has begun to change. Where Bill Clinton rarely mentioned inequality, Barack Obama has given several important speeches on the theme.

In Australia, Wayne Swan opened up a conversation about inequality, even using the words of Bruce ‘The Boss’ Springsteen to talk about the widening gap between bosses and workers. Today, Opposition Leader Bill Shorten and Shadow Treasurer Chris Bowen are comfortable talking about the risk that excessive inequality poses to Australia.

One reason that the earlier cohort of Labor leaders did not talk much about inequality was that it was comparatively low. When the Hawke government was elected, inequality was not one of Australia’s significant problems. But as the level of inequality rises, it demands more attention from all of us within the national parliament. The gap between the powerful and the powerless has grown. So more than ever, Labor must be the voice of the vulnerable. If we do not speak out for those on the margins of our society, who will?

When Labor is given the chance to govern again, our party should assess policy proposals based on how they will affect the gap. With Australian inequality higher than it has been for three-quarters of a century, we must not ignore the distributional consequences of policy. In the future, Labor governments must ask themselves about every proposal: how will this benefit the most disadvantaged?

In welfare policy, this means maintaining our targeted social safety net, and rejecting policies like Work for the Dole, which have been shown by an independent evaluation to actually increase joblessness.[13] In education policy, it means targeting resources at the most disadvantaged. There is nothing fair about a system where poor children are taught by rookie teachers, while rich children get to learn from the best and most experienced teachers. In economic policy, it means a commitment to strong economic growth and low unemployment. Recessions hit the poor hardest, and creating jobs for the truly disadvantaged is always easier in a booming economy.

Maintaining the egalitarian ethos

While the evidence on the level of inequality in Australia is troubling, as a nation, we should be optimistic about our ability to tackle this problem. As a first step, we must firmly acknowledge that there is nothing inevitable about inequality going up. My grandfather, Roly Stebbins, was born in 1922. He celebrates his 92nd birthday this year. For most of his life, inequality in Australia has been falling, with the last few decades an aberration.

As Roly entered the workforce, Australia was undergoing a ‘great compression’. From the early 1940s to the late 1970s, there is clear evidence showing that our nation experienced a significant drop in inequality. To put the size of the equalisation in perspective, the reduction in inequality over these three decades was as large as the modern-day difference in inequality between Australia and the much more equal countries of Scandinavia.[14] Falling inequality among men was accompanied by a steady narrowing of the gender pay gap during this period, with the equal pay cases of 1969 and 1972 being key milestones.[15]

For Australia to make such a shift in a single generation was radical, and the change was keenly felt by those at the top of the heap. Craig McGregor, writing in the 1960s, said that the wealthy ‘feel under some pressure to be accepted by ordinary working Australians rather than the other way round’.[16] Visiting in 1963, Dame Edith Sitwell said, ‘I am struck by something indisputably gentle about Australia.’[17]

Inequality fell markedly in the 1950s and 1960s. Growth was broadly shared. And, it is worth noting, this significant levelling out took place under a Coalition government.There is much about this era that we would not wish to replicate today, nor will the policies that worked then likely be the same ones that are needed in the years ahead. But the egalitarian success of the post-war decades should be a source of great optimism for Australians when we set out to reduce inequality today.

In working to make this nation more equal again, one of our greatest strengths is the egalitarian ethos which is deeply rooted in the Australian psyche. In the 1850s, an English gold-digger wrote home that ‘Rank and title have no charms in the Antipodes’.[18] In the 1880s, an essayist summed it up by saying: ‘In England the average man feels that he is an inferior, in America that he is a superior; in Australia he feels that he is an equal. That is indeed delightful’.[19] Peter FitzSimons recounts the tale of a conversation with Bob Hawke, in which an insistent waitress twice interrupted the then prime minister in mid-sentence to take his coffee order. Unlike many nations, Australia is a place where a waitress feels no qualms about interrupting the most politically powerful person in the land.

We should protect and promote the egalitarian ethos which makes this possible. This ethos is the foundation upon which any practical measures to address inequality will be built; it provides the answer whenever somebody asks: ‘does inequality matter?’ The past generation has seen great success for the Australian economy. Our nation is more productive and entrepreneurial, more open to ideas, products and people from overseas. Yet at the same time, our community has become more unequal. We do not need to recreate the 1960s to reclaim that era’s high levels of equality. But the memory of that time should remind us of what is possible and the ethos of egalitarianism should continue to inspire and motivate us today. Too much inequality strains the social fabric, threatening to cleave us one from another. Australia is a stronger nation when we stand together than when we pull apart.


Andrew Leigh is the Shadow Assistant Treasurer and Member for Fraser in the Commonwealth Parliament. His website is www.andrewleigh.com. He is also the author of Battlers and billionaires: the story of inequality in Australia (Black Inc, 2013)


Notes


[1] John Hirst, 2010, The Australians: Insiders and outsiders on the national character since 1770’, second edition, Black Inc., Melbourne, pp.144–145.

[2] Peter Kieseker, 1993, Peacekeeping: challenges for the future, cited in Hurst, The Australians (see note 1), pp.57–58.

[3] These figures are from the Employee Earnings and Hours survey. For comparability, they cover full-time adult non-managerial employees. Figures are reported on a weekly basis, but these have been converted to annual wages for comparability with most other figures in this article. Over the period 1975 to 2010, the percentage increases in earnings were 15 per cent at the tenth percentile, 23 per cent at the twenty-fifth percentile, 35 per cent at the median, 49 per cent at the seventy-fifth percentile, and 59 per cent at the ninetieth percentile. I am indebted to Rob Bray and Peter Whiteford for their assistance in obtaining earlier years’ data.

[4] This figure is in nominal dollars, and is simply calculated by multiplying each year’s personal income estimate by the difference between the actual top 1 per cent share and the top 1 per cent share in 1980–81.

[5] The use of inheritance tax records to estimate inequality dates back to the first decade of the twentieth century. Underlying this approach is that the dead are representative of the living. In effect, this approach ‘blows up’ the inheritance tax distribution by multiplying it by the inverse of the mortality rate. Put another way, if death is a random sampling technique, then the inheritance tax returns can tell us about wealth inequality among the living. Implementing this approach requires tabulations that separate estates by age and gender (given that wealth differentials fan out over the life-course).

[6] Angus Grigg, 2010, ‘How did we get so rich?’, Australian Financial Review, 23–28 December, pp.32–33.

[7] Australia had 739 registered helicopters in 1996, 943 in 2000, and 1800 in 2010. See Department of Infrastructure and Transport, Bureau of Infrastructure, Transport and Regional Economics, 2010, General Aviation Activity 2010, BITRE, Canberra (and its predecessor publications); Lisa Allen and John Stensholt, 2011, ‘The flying high club’, Australian Financial Review, 1 August.

[8] While I have been unable to find a good long-run wage series for Australian lawyers, a US example makes the point. In 1967, the starting salary in top New York law firm Cavath, Swaine and Moore was 14 per cent higher than the average pay for young male university graduates. In 2005, it was 120 per cent higher. See Frank Levy and Peter Temin, 2007, ‘Inequality and institutions in twentieth century America’, NBER Working Paper No.13106, NBER, Cambridge, MA.

[9] David Nason, 2006, ‘Bob Joss now bats for other team’, The Australian, 9 October.

[10] This result comes from a 2009 Hewitt CSi survey that asked companies where they would position three elements of CEO pay: base pay, short-term incentives and long-term incentives. Precise answers differed across these elements, but the average was that about 45 per cent of firms would pay above median, about 50 per cent would pay the median, and about 5 per cent would pay below the median. See David Peetz, 2010, ‘Asymmetric reference points and the growth of executive remuneration’, Working Paper, Centre for Work, Organisation and Wellbeing, Griffith University, Brisbane.

[11] Jeff Borland found that changes in union density could explain approximately 30 per cent of the increase in variance of male full-time earnings between 1986 and 1994, and around 15 per cent of the increase in variance of female earnings. See Jeff Borland, 1995, ‘Union effects on earnings dispersion in Australia, 1986–94’, British Journal of Industrial Relations, Vol.34, No.2, pp.237–248. See also Ann Harding, 1997, ‘The suffering middle: trends in income inequality in Australia, 1982 to 1993–94’, Discussion Paper No.21, NATSEM, Canberra; Jeff Borland and Roger Wilkins, 1996, ‘Earnings Inequality in Australia’, Economic Record, Vol.72, No.216, pp.7–23

[12] A study looking at the correlation in siblings’ outcomes find a higher correlation in incomes than height or weight (Bhashkar Mazumder, 2008, ‘Sibling similarities and economic inequality in the US’, Journal of Population Economics, Vol.21, No.3, pp.685–701), a result that prompted US author Timothy Noah to conclude: ‘I am less a master of my fate than I am of my body mass index’: Timothy Noah, 2012, The great divergence: America’s growing inequality crisis and what we can do about it, Bloomsbury Press, New York.

[13] Jeff Borland and Yi-Ping Tseng, 2003, ‘Does ‘Work for the Dole’ work?’, Melbourne Institute Working Paper no.14/4, Melbourne Institute of Applied Economic and Social Research, University of Melbourne, Melbourne

[14] A nine point difference in the Gini co-efficient is what today separates Australia from the more equal Scandinavian countries (or, in the opposite direction, from the more unequal Latin American countries): OECD, 2011, ‘Income inequality’, in OECD Factbook 2011–2012: economic, environmental and social statistics, OECD Publishing, Paris, p.81.

[15] Gender pay gaps narrowed through the post-war decades, but the equal pay cases were important because the 1969 decision determined that a woman’s award wages must be at least 85 per cent of men’s award wages, while the 1972 decision determined that men’s and women’s wages must be equal.

[16] Quoted in John Hirst, 2009, Sense and nonsense in Australian history, Black Inc, Melbourne, p.172

[17] Quoted in Craig McGregor, 1966, Profile of Australia, Hodder and Staughton, London, p.93

[18] Quoted in Sol Encel, 1979, Equality and authority: a study of class, status and power in Australia, Tavistock, London  p.49. This was particularly due to the Victorian government’s decision to prescribe a small claim size on the diggings, which increased the number of people who had access to the ‘lottery’: see Ian McLean, 2013, Why Australia prospered: the shifting sources of economic growth, Princeton University Press, Princeton  

[19] Francis Adams, 1886, Australian essays, W. Inglis, London, p.33.

See also:

Suggested citation
Leigh, Andrew, 'Battlers & billionaires', Evatt Journal, Vol. 13, No. 6, September 2014.<http://evatt.org.au/papers/battlers-billionaires.html>