Andrew Leigh

Tall Poppies in the Land of the Fair Go, The Drum, 18 July 2012

Since 1980, 14 per cent of all personal income growth in Australia has gone to the richest 1 per cent.

That group - currently those individuals earning over about $200,000 - have received 14 times their share of Australia's economic growth in the past generation.

With Oxford University's Tony Atkinson, I have been compiling data on the income share of the rich in Australia over the past century. Our new estimates, which now run from 1912 to 2010, show that for most of the twentieth century, the top 1 per cent earned less than 1 per cent of all economic growth.

From the 1910s to the 1970s, the share of income earned by the super-rich steadily shrank. But the pattern over the past generation has been quite different.

The share of income earned by the top 1 per cent has doubled. The income share of the richest 0.1 per cent - the top 1/1000th of adults - has tripled. The ratio of CEO salaries to the salaries of average workers has risen dramatically.

True, we still remain relatively equal when compared with the United States. Over the past generation, the top 1 per cent share in both countries has doubled. The result has been that we have ended up about where they were in 1980.

And while median US incomes have barely budged in two decades, the typical Australian household has enjoyed steady income growth over the same period. Since 1993, more than half of US growth has gone to the top 1 per cent. For Australia, the figure is about one-eighth. Little surprise that the cries of 'We are the 99 per cent!' were heard more loudly on the other side of the Pacific Ocean.

And yet the drivers of top income inequality are quite similar in both nations. Computerisation and the internet revolution have disproportionately boosted incomes at the top: an effect that economists have termed 'skill-biased technological change'.

Under governments of all political stripes (but particularly under Hawke and Reagan), top tax rates were cut dramatically. And in 'superstar' labour markets like CEOs, lawyers, and sports stars, a global search now means that those at the top of their game earn a global wage.

Top income inequality is not without its benefits. For example, the vast rewards to making it big in America is probably one reason why the US produces so many entrepreneurs. And America's famously generous philanthropists are partly a product of a nation with extremely large fortunes at the very top.

But inequality also has its costs. At its heart, economics is about maximising wellbeing, not money. Because a dollar buys more happiness for a pauper than a millionaire, a more equal distribution of income probably raises the average level of wellbeing.

Another reason to favour equality is that human beings exhibit a strong preference for equality. I recently asked my five-year-old son whether he'd prefer that his brother got three biscuits and he got two, or both of them got one biscuit apiece. He chose the latter.

Adults share this taste for equality. In a famous experiment called the 'Ultimatum Game', the first player gets to choose how to divide a sum of money, and the second player decides whether they both get these suggested shares, or both go home with nothing.

If the second player didn't care a whit about inequality, she should accept any amount of money at all. But in a host of different contexts, players routinely reject offers of less than 20 per cent. As economist Lester Thurow once put it, a more equal income distribution is like a 'public good'.

Finally, inequality may carry costs to society. Seven-figure donations to political parties raise the risk that policy outcomes can get skewed to the very rich. In addition, more inequality probably means less social mobility. The larger the gap between rich and poor, the more the circumstances of a child's birth is likely to determine their life outcomes.

Andrew Leigh is the Federal Member for Fraser. This is an edited version of his Young Economist Award keynote address to the 2012 Australian Conference of Economists. View his full profile here.