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Income Distribution: Trends in earnings distribution
Income Distribution: Trends in earnings distribution
Inequality in the distribution of earnings of fulltime adult employees has increased in the last decade.
Increasing inequality in the distribution of earnings of fulltime adult employees in Australia became evident in the 1980s. However, the increase was small and comparable to trends in countries such as Canada and Japan. An OECD study compared earnings distributions in 17 countries and found that increases in dispersion in the 1980s occurred in twelve of them^{1}. The early 1990s figures for Australia suggest that this trend may be continuing.
Although the distribution of earnings highlights the disparity between high and low earning employees, an increase in dispersion is not in itself indicative of changing economic wellbeing. An employee's earnings could decline relative to other employees' and yet still increase in real terms. Similarly, disposable incomes could increase or remain static in relative terms even if gross earnings fell relatively. Distributional changes that increase the difference between high and low earners suggest increasing inequality and increasing polarisation of fulltime employees into comparatively high and low earners.
Both male and female fulltime adult employees experienced increasing earnings inequality through the 1980s and into the early 1990s. Earnings inequality was consistently greater among men and the rate at which male earnings inequality increased was also slightly greater than that for females.
The OECD considered that among the economic and demographic factors that may have underlain the trend towards greater dispersion of earnings during the 1980s, the decentralisation of wage bargaining was particularly pertinent to Australia^{1}.
In Australia, the 1983 Wages Accord established a centralised wage fixing system that took into account economic policies and the Consumer Price Index (CPI). Several renegotiations of the Accord took place such that, by 1987, wage indexation was abandoned due to economic conditions. The replacement was a twotier system that distributed a flat increase to all workers and made further increase provisional on improvements in efficiency. In 1988 and 1989 efficiency provisions were replaced by award restructuring and training provisions^{2}.
Another factor underlying the trend towards greater earnings disparity has been the shift among the fulltime labour force towards more highly skilled, and hence higher earning, occupations. Between 1986 and 1993 the numbers of people employed as managers and administrators, and in professional occupations increased by 17% and 26% respectively. The numbers employed as plant and machine operators, and labourers declined by 6% and 4% respectively. The total fulltime labour force increased by 4% over the period.
Earnings can be adjusted for changes in the CPI. The resulting pattern of real earnings growth shows that, after considerable increases early in the 1980s, earnings devalued, in real terms, such that by 1987 earnings at the top of the 9th decile and median earnings had returned to 1983 values, and earnings at the top of the 1st decile had dropped to 95% of 1983 values. Between 1987 and 1990, median earnings declined slightly in real terms while earnings at the level of the top of the 9th decile maintained their value. For employees at the top of the 1st decile, earnings diminished in real terms to a low of 92% of 1983 values in 1990. Since 1990, real earnings have increased for the three points in the distribution, but for employees at the top of the 1st decile the real value of their earnings in 1993 was still less (95%) than the value of their earnings in 1983.
Measuring earnings distribution
The movement of earnings distribution ratios is a simple way of measuring change in the distribution of earnings over a period of time. Earnings at points near the top and bottom of the distribution are expressed as a ratio to the median earnings (the amount at which half of employees earn more and half earn less) and the difference between the two ratios provides a simple index of dispersion. This is repeated for consecutive distributions. An increasing difference between the ratios indicates increasing inequality.
The values in the distribution used in this review are the upper cutoff point of the 1st decile and the upper cutoff point of the 9th decile i.e. the amount below which 10 per cent of employees earned less and the amount above which 10 per cent of employees earned more, respectively.
Throughout this review these points will simply be referred to as the top of the 1st decile and the top of the 9th decile.

EARNINGS DISTRIBUTION RATIOS FOR FULLTIME ADULT EMPLOYEES
Source: Survey of Employee Earnings and Hours
EARNINGS DISTRIBUTION RATIOS FOR FULLTIME ADULT EMPLOYEES

 1983  1985  1986  1987  1988  1989  1990  1991  1992  1993p 
 ratio  ratio  ratio  ratio  ratio  ratio  ratio  ratio  ratio  ratio 

Males           
 1.60  1.62  1.64  1.62  1.63  1.62  1.64  1.66  1.68  1.70 
 0.72  0.70  0.69  0.68  0.68  0.67  0.67  0.67  0.67  0.65 
Females           
 1.50  1.50  1.51  1.50  1.52  1.51  1.49  1.53  1.55  1.56 
 0.78  0.78  0.77  0.75  0.74  0.73  0.74  0.74  0.73  0.74 
Persons           
 1.60  1.62  1.64  1.62  1.63  1.62  1.64  1.68  1.67  1.68 
 0.73  0.72  0.71  0.70  0.69  0.68  0.69  0.69  0.70  0.68 

Source: Survey of Employee Earnings and Hours
Consumer Price Index (CPI)
The CPI is a measure of change over time in the retail price of a constant basket of consumer goods and services. The choice of goods and services is representative of consumption patterns of resident employee households in Australian metropolitan areas. The CPI is often, and inappropriately, referred to as a costofliving index. The CPI does not take into account changes in the standard of living and substitutions consumers may make in response to changing market conditions.

REAL EARNINGS INDEX(a) FOR SELECTED DECILES
(a) Index based on 1983 earnings adjusted to constant values using the CPI.
Source: Survey of Employee Earnings and Hours; CPI Ausstats
Endnotes
1 Organisation for Economic Cooperation and Development (July 1993) Earnings Inequality: changes in the 1980s OECD Employment Outlook.
2 Murdoch University Economics Programme: July 1989 Six Years of the Accord: an Assessment Working Paper No. 28.
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