Distribution of Income

Supply Side Factors Affecting Income Distribution

In recent years, the Australian government has made many decisions to try and restructure the domestic economy. This process has improved the growth outlook for the economy, and it has also assisted in the ability of the economy to achieve consistently low rates of inflation. However, these same processes have also contributed to the inability of the Australian economy to make the distribution of income more equitable.

In particular, since the late 1970s Australia has had an increasing focus on the process of microeconomic reform. Industries such as banking, telecommunications, airline travel, postal services and energy have all been restructured due to government initiatives. This process is an attempt by the government to increase the supply potential of the Australian economy.

For example, in the telecommunications sector, we can see that there are now many providers of services where previously there was only one. This process began when the sector was deregulated, and a large percentage of Telstra was sold to the private sector. (This will be discussed in more detail in Unit 4.) The immediate impact of this was an attempt by the management at Telstra to make the company more efficient. In doing so, they decided to end the employment of around 30,000 people in the company.

The reforms did have the desired effect – prices are lower, output is higher and the telecommunications industry is more efficient. However, the short term cost of this change was an increase in the rate of unemployment. As a direct result, the income to these people fell, and therefore the distribution of income in the Australian economy became worse. Other microeconomic reforms have had a similar impact. (*It is very important to note that this impact appears to have been short term – overall employment in the telecommunications sector is much higher today than it was before the reforms were implemented.)

Further restructuring processes have also occurred. During the 1990’s the general tariff rate was lowered, and Australia has committed to removing all tariffs by 2020. Tariffs protect local industries – when they are decreased local jobs are put at risk, and this can have a direct impact on the distribution of income.

In 1996, the newly elected Liberal government implemented the Workplace Relations Act. The exact impact of this act on the distribution of income is unclear. On the one hand, once the Act became law, casual and part time workers appeared far more attractive to employers. This resulted in fewer full time positions being created, and as such new people entering the workforce were less likely to receive a full time position. This may have contributed to making the distribution worse. However, also as a result of this change the unemployment rate in Australia fell. This meant that more people had access to an income than previously – as such the impact on the distribution of income may have been positive.

Similarly, in July 2000 the government reformed the taxation system in Australia. As the GST was introduced, several other reforms were implemented. The GST may well have made the distribution more inequitable, however the former government would argue that the other changes offset this problem. For example, many products that are considered “necessities” do not attract the GST, and as people on lower incomes are more likely to spend their money on necessities than luxuries they are less likely to pay the tax. Also, at the same time income tax rates were lowered, and transfer payments were increased. Combined the government feels that the impact on the distribution of income will be positive.

As with demand factors, we can also argue that any supply factor that leads to a lower unemployment rate or low rates of inflation will also have a positive impact on the distribution of income.

You can examine the supply side factors which have affected the rate of unemployment by clicking here.

You can examine the supply side factors that have affected Australia’s rate of inflation by clicking here.

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