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Income Distribution: Trends in earnings distribution
An earlier review in this series (see Australian Social Trends 1994, Trends in earnings distribution) described the increasing inequality in the distribution of wage and salary earnings of full-time adult employees. It noted that the trend to increasing inequality became evident in the 1980s and that figures for the early 1990s ‘suggest that this trend may be continuing’. This review examines the recent data to assess whether earnings inequality is still growing.
The degree of inequality in the distribution of earnings has potentially important economic and social consequences. If the distribution is too compressed, the incentive for workers to seek higher-paid positions will be low and this may undermine the willingness of workers to seek better-paid jobs. In aggregate, this may adversely affect productivity growth and, over the longer term, the growth in living standards. However, there are also arguments against allowing the distribution of earnings to become too unequal. How much inequality a society is prepared to tolerate is one indication of what kind of society it is, although it needs to be recognised that there will be differing views on how much inequality is tolerable and how far existing inequalities should be changed.
This article does not aim to draw any conclusions about whether the observed changes have been for the better or the worse. This would require judgements to be made about the desirability of alternative earnings distributions, and is a task that cannot be answered by statistics alone.
Changes between 1985 and 1998
The trend to greater earnings inequality has continued throughout the 1990s.1 During the period from 1985 to 1998, the earnings of full-time adult employees at the lower end of the distribution (those at the 10th percentile) rose by less than earnings in the middle of the distribution (i.e. the P10/P50 ratio declined by 10%). The earnings of those at the top of the distribution (the 90th percentile) rose by more than those in the middle (i.e. the P90/P50 ratio increased by 6%).
Men and women
Throughout the period (1985-1998) the earnings inequality, as measured by both the P10/P50 and P90/P50 ratios, among males exceeded that among females, notably at the top end of the distribution. Changes over the period exacerbated this difference, reflecting movements at both the lower and upper ends of the distribution.
While higher-earning males improved their position relative to the median (particularly between 1989 and 1993 and again after 1996) the position of higher-earning females relative to median female earnings rose between 1989 and 1993, but was broadly stable before and after this period. The earnings of both lower-paid male and female workers declined relative to the median. As a result of these changes, the ratio of male to female earnings at the 90th percentile of each distribution increased from 1.34 to 1.36 between 1985 and 1998, while at the 10th percentile it declined from 1.12 to 1.08.
MOVEMENTS IN EARNINGS RATIOS AT THE TOP OF THE EARNINGS DISTRIBUTION P99/P50
Source: Unpublished data, Survey of Employee Earnings and Hours, 1985 to 1998.
Changes at the very top
At the very top of the distribution, the earnings of both male and female employees at the 99th percentile have risen steadily relative to median earnings. Again, the trend is more pronounced for males. In 1985, male earnings at the 99th percentile were around 2.6 times greater than median male earnings. By 1998, this ratio had increased to 3.2. The corresponding ratios for females were 2.1 in 1985 and 2.6 in 1998. Thus, by the end of the period, the position of very high female earnings relative to median female earnings was about the same as the corresponding position for male earnings in 1985.
CHANGES IN EARNINGS AT DIFFERENT POINTS OF THE EARNINGS DISTRIBUTION RELATIVE TO CHANGES IN THE CONSUMER PRICE INDEX
Source: Unpublished data, Survey of Employee Earnings and Hours, 1985 to 1998; CPI Ausstats.
It is important to highlight the distinction between changes in the distribution of earnings and changes in the real purchasing power of earnings. The former compares changes in the positions of those earning low, medium and high earnings by summarising movements in the relativities between them. The latter compares movements in an individual’s earnings with movements in the cost of a representative basket of goods and services, as reflected, for example, in the Consumer Price Index (CPI).
The real level of earnings increases when earnings rise by more than the change in the CPI, because in these circumstances it is possible to purchase more or better quality goods and services than before. In practice, it is possible for an individual’s earnings to rise by more than the CPI, but to rise by less than the earnings of other workers. In this case, real earnings will have increased but relative earnings have declined.
Movements in earnings relative to changes in the CPI at different points in the earnings distribution can be seen on the following graph. Over the thirteen-year period 1985-1998, earnings at the 10th percentile rose by less than the CPI (i.e. the level of real earnings declined); earnings at the median and 90th percentile rose modestly relative to the CPI; while earnings at the 99th percentile rose substantially faster than the CPI.
Movements in earnings relative to changes in the CPI were generally downwards until 1990 at all parts of the earnings distribution, but since then the trend has been upwards. Even so, the improvement since 1990 has not been sufficient to offset the decline in real earnings experienced at the 10th percentile between 1985 and 1990. Thus, in terms of purchasing power, lower-earning persons were still slightly worse off 1998 than in 1985.
CHANGES IN REAL EARNINGS(a) BY SECTOR, 1985-1998
Source: Unpublished data, Survey of Employee Earnings and Hours, 1985 to 1998.
Public and private sectors
Research has identified differences in the changes in the earnings distributions of employees in the public and private sectors.2 This is confirmed when comparing changes in real earnings at different percentiles of the distributions of public sector and private sector employees, respectively.
Such comparisons need to be interpreted carefully. The observed distributional changes will reflect changes in the distribution of jobs as well as changes in the earnings attached to particular jobs (see box on previous page). Employment has been growing at different rates in the public and private sectors (see Australian Social Trends 1998, Public Sector Employment) and this is likely to affect how earnings are distributed in each sector. There is, for example, evidence that the number of lower-paid public sector positions has been declining in recent years:3 this will have had an influence on how public sector earnings are distributed.
Between 1985 and 1998, there was a substantial increase in inequality of earnings in the private sector. The level of real private sector earnings at the 10th percentile fell over this period, although private sector earnings at other points in the distribution rose in real terms, with the amount of the rise increasing at each percentile. At the 90th percentile, real earnings rose by almost 20%, while the increase at the 99th percentile was over 40%.
Changes in the real earnings of public sector employees over the period reveal a very different pattern. The change in real earnings was spread far more evenly across the entire distribution, with the largest increases occurring at the 40th and 50th (median) percentiles. The increase in real earnings for public sector employees at the 10th percentile (P10) was just over 8%, while that at the 90th percentile (P90) was slightly lower, at 6.5%.
The patterns imply that there have been considerable changes in private and public sector earnings differentials at different points in the two distributions. At the 10th percentile, public sector earnings in 1985 were 11% higher than private sector earnings at the same percentile. By 1998, this differential had more than doubled to 24%. At the 90th percentile, public sector earnings in 1985 were 9% above those in the private sector. By 1998, they were almost 3% lower.
The biggest change in the private/public sector earnings differential took place right at the top of the two distributions. This is in line with the very large increases in the earnings of chief executive officer and senior management employees in many private companies.
In 1985, public sector earnings at the 99th percentile were 8% higher than private sector earnings, but by 1998, this differential had reversed to the point where private sector earnings exceeded public sector earnings by 9%.
1 Norris, K. and Mclean, B. 1999, ‘Changes in earnings inequality, 1975 to 1998’, Australian Bulletin of Labour, vol. 25, no. 1, pp. 23-31.
2 Nevile, J.W. and Saunders, P. 1998, ‘Globalization and the return to education in Australia’, The Economic Record, vol. 74, no. 226, pp. 279-285.
3 Public Service Merit Protection Commission 1996 , ‘Long term trends in the Australian Public Service: 1986-87 to 1995-96’, Australian Public Service Staffing Statistics Report, PSMPC, Canberra.