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Until now, we have used a supply and demand graph to help us to analyse the way in which goals are affected by changes in aggregate supply and aggregate demand.  This was made possible by the fact that the y-axis measures the overall level of production in the Australian economy, and as a result it is easy to equate this to economic growth.  We have also seen that there is a strong correlation between production and employment.

The link to income distribution is not nearly as strong.  Despite this, we can theorise about the way in which demand factors will affect the Gini co-efficient in this country.

We will examine this by looking closely at the relationship between business confidence and income.  In theory, when business confidence increases, we should see an increase in investment spending.  During this period, it is likely that the aggregate demand curve will shift to the right.  As a result, we would expect higher levels of economic growth, and lower levels of unemployment.

If more people have jobs, then it follows that there will be more people who are earning factor income.  If the unemployment rate falls far enough, then it seems logical that the distribution of income will become more equitable.

In isolating a factor in this way, we are really over-simplifying the matter.  For example, what could cause business owners to become more confident?  This would happen when interest rates remained relatively low for an extended period, when taxation rates were stable (or falling), when the labour market was positive, or even when the external sector was demanding more of our exports.  In the first decade of the twenty first century, the Australian economy was able to boast most (although not all) of these positive attributes.  While one result was certainly higher levels of confidence, it could also be that each of these things contributed to the improvement in equity that was seen during this period.

There are other demand factors that can have a far more direct impact on equity.  For example, if the minimum wage increases (as it did in late 2006), then it is likely that equity will improve.  Similarly, targeted changes to the marginal income tax system can affect equity.  If the top rates are reduced, the higher income earners will be keeping more of their factor income each month; this could result in a more inequitable society.  On the other hand, if changes are made that result in lower income earners paying less in income tax, then the distribution of disposable income could become more equitable.

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