Distribution of Income

Definition

It is important to the ongoing prosperity of the economy that people are motivated to go out and work, and that they are rewarded for doing so. If the government worked to ensure that everyone received the same level of income regardless of the contribution that they made, then many people may consider that there is no need to work. This is clearly an undesirable situation, and so we say that the government aims to achieve equity in the opportunity to earn an income, whilst retaining the profit motive for those who go out and seek to earn a higher income.

There are several different “types” of income of which you will need to be aware when studying this section of the course.

Factor income: When a person “earns” income, we refer to this as factor income. This is because to gain this type of income you must be using a factor of production. For example, you might receive a wage for your labour, or rent from your land. You could also earn profits from your enterprise, or interest on your capital. All of these are forms of factor income. This is also known as “market income”.

Transfer income: This is a type of income that is not earned. Rather, the money is “transferred” to a person in an effort to reduce the degree of income inequality. An unemployment benefit is one form of transfer income.

Gross income: This is defined as the sum of transfer income and factor income, before the deduction of income tax.

Disposable income: After a person receives their factor income and their transfer income, the government will take a percentage of this amount in tax. Disposable income is the income that remains for you to spend after income tax has been deducted.

Social Wage income: This is a very difficult concept to quantify. The government is very interested in the concept of social wage income, as it pertains to both the disposable income that people receive and the non-cash benefits that are made available to people. For example, we should consider that access to free public education, health services and other government services contribute to the standard of living of Australians.

Final income: In the process of consuming goods and services, Australian’s must pay certain indirect taxes. For example, the GST is paid when we buy most goods and services. As the payment of these taxes does not add to our standard of living, we can consider that our “final income” is the social wage that we receive, minus any indirect taxes that we pay.

From time to time, you will come across one other "type" of income; discretionary income. You must ensure that you use this term carefully, as it is not an official income type. No measure of discretionary income exists, and the term is not used by either the government nor the Australian Bureau of Statistics when they are discussing income distribution. The term is used frequently in Economics so that students do not misuse the term "disposable income". For example, when interest rates increase, we can say that our discretionary income (the income that we can use at our discretion) has fallen. On the other hand, our disposable income (gross income minus income tax) remains unchanged. It is very important that you are aware of this distinction. A good habit to adopt in Economics is to always define the type of income that you are discussing after naming it - this will help to ensure that anyone marking your work is very clear about your meaning.

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