Andrew Leigh

ANZSOG/VPSC Victoria Lecture Series

Melbourne

19 February 2015 

In late 2001, at the age of fifty-five, the Australian journalist Elisabeth Wynhausen decided to take leave from her job and try life as a low-wage worker. Following in the footsteps of George Orwell’s Down and Out in Paris and London and Barbara Ehrenreich’s Nickel and Dimed, Wynhausen’s Dirt Cheap documents her year living in budget accommodation and working at entry-level jobs.

In one job, Wynhausen moved to a country town and worked packing eggs. She earned $14 an hour in a job that started at 6 a.m., left her body aching at the end of the day, and where the smell from the nearby chook sheds was constant. Three weeks in, the manager, a millionaire several times over, came to speak to the workers. He announced that the company was selling its egg division. ‘It’s not all doom and gloom,’ he told them – but they knew their jobs were going. Wynhausen was struck by the fact that none of the workers challenged the manager: ‘seeing them standing mute in front of the boss was like seeing them stripped of all defences’.

In another job, Wynhausen worked as a cleaner, noting that her interviewer seemed to treat her ‘as if one cleaner were the same as another and one cleaning job the same as the next’. She was pleased to get the job immediately, but then realised that she was simply being put on ‘permanent standby’, to work if other employees were sick or on holidays. Again and again, she witnessed workplaces in which ‘flexibility’ meant that employers had their workers on-call 24/7, but could always cut their shifts if customer demand declined.

A couple of years ago, I wrote a book titled Battlers and Billionaires: The Story of Inequality in Australia. There, I set out to tell Australia’s great egalitarian story – to explore how fairness is woven through our social fabric. In Japanese prisoner-of-war camps, Australians like Weary Dunlop and Tom Uren made sure that our troops shared what they had, and that more of them walked out alive. Unlike other nations, Australians don’t have private areas on our beaches, we call each other mate, and we comfortably sit in the front seats of taxis. On the sporting field, salary caps, player drafts and revenue sharing are all ways of making the game fairer – and more interesting.

The central argument of Battlers and Billionaires is to warn of the risk that this great egalitarian culture might be coming adrift from the economic reality of inequality. Over the past generation, Australia’s top 1 percent income share has doubled, and the top 0.1 percent income share has tripled. Our nation has twice as many private planes as it did a decade ago, and yet one in seven people cannot afford dental care.

Since I wrote that book in 2013, the conversation about inequality has only grown more intense.[1] Thomas Piketty’s Capital in the Twenty-First Century has proven that economic history is not dead, and indeed that there is a big appetite for big thinking on how unequal we want to become. Last year, Pope Francis called for ‘the legitimate redistribution of economic benefits by the state, as well as indispensable cooperation between the private sector and civil society’. In this year’s State of the Union address, Barack Obama focused squarely on the risks that excessive inequality poses to social mobility – to the American Dream itself.

And alongside Piketty, the Pope and the President, it would be remiss of me to forget our Prime Minister. Last year’s budget may have been the most regressive in living memory, but the community reaction has reinvigorated the conversation about inequality.[2] So while I disagree with their policies, I should thank the knights and dames Prime Minister and his cigar-smoking Treasurer for putting egalitarianism back on page one where it belongs.

In this talk, I want to focus on the question of why inequality matters and what we can do about it. But to begin with, let’s talk about the sources of inequality.

Growing Unequal

A significant portion of the rise in Australian inequality over the past decade relates to changes in the labour market. Work is the principal sources of income for most households, and the gap between the well-paid and low-paid has been steadily growing.

From 1975 to 2014, real wages have risen by $7000 for the bottom tenth, but $47,000 for the top tenth. Put another way, the top tenth of Australian earners have received a pay rise that is bigger than the total pay of the bottom tenth.

In percentage terms, those at the bottom have seen an earnings rise of 23 percent, while the top have seen an earnings rise of 72 percent – three times more. If cleaners and checkout workers had received the same proportionate pay rise as solicitors and surgeons, they would be $16,000 a year better off.

One reason for this is the decline of union density over this period. If you want a single institution in the Australian labour market that acts as a bulwark against inequality, it’s unions. Unions tend to bargain for dollar pay increases – which disproportionately benefit those at the bottom. They advocate pay equity across firms and across industries. Unions have also underpinned key campaigns for pay equity for women and Indigenous Australians.

Another major driver of inequality are the twin forces of technology and globalisation. Computers can now beat chess world champions and fly a helicopter. Global outsourcing is possible with everything from record-keeping in healthcare to designing your website.

A recent economics paper estimated that 47 percent of occupations could be replaced by a computer within a few decades, with the odds especially high in occupations such as dishwashers (77 percent), pharmacy technicians (92 percent) and telemarketers (99 percent).[3] An xkcd cartoon features one character saying ‘Well, at least humans are still better at, uh, coming up with reassuring parables about things humans are better at?’.[4] The comic finishes with a computer running a program to generate thousands of reassuring parables per second.

It’s true that some high-wage occupations are under threat, but the likely effect is what economists call ‘skill-biased technological change’. This is the general rule that technology tends to raise the wages of high-skill workers more than low-skill workers. For example, the computer revolution in law firms helped raise the earnings of partners, while rendering thousands of typists redundant.

Why does it matter?

But does it matter if earnings are rising faster at the top than at the bottom – if the ocean liners are rising faster than the tugboats?

One concern about inequality is that societies with a large gulf separating the haves and have-nots are those in which few people escape the circumstances of their birth.[5] Think of a ladder. If inequality measures the gaps between the rungs, then intergenerational mobility measures how easy it is to climb up or down. If the rungs move wider apart, the ladder becomes harder for someone to climb. In a very unequal society, you are likely to stay on your birth rung.

In Australia, income mobility across generations is worse than in Scandinavia, but better than in the United States. One way of thinking about the difference is to compare the hereditability of income with the hereditability of height.

In the United States, the hereditability of income is similar to the hereditability of height. In Australia, the effect is only half as strong. But in in countries such as Sweden and Denmark, the hereditability of income is smaller still.

Some people say that we should put up with large inequalities so long as anyone can move from rags to riches.

But now we know that the two are linked. The more unequal society becomes, the more that a parent’s income will determine where their child ends up.

More inequality means less social mobility – a relationship that Princeton’s Alan Krueger has dubbed ‘the Great Gatsby Curve’.[6]

Another reason that inequality matters comes from a simple thought experiment. Suppose you had an equal chance of being born into any of the five wealth quintiles in Australia. Would you prefer to be born into a society where the rich had 60 times as much wealth as the poor? Or a society where the rich had about one-and-a-half times as much wealth as the poor? The first ratio represents the true distribution of wealth in Australia.[7] When surveyed about their ideal distribution, though, the majority of respondents wanted the nation to be more egalitarian. Indeed, the ratio of the rich having one-and-a-half times as much as the poor is the average survey response of the most affluent respondents.

Economic inequality may have risen, but egalitarianism remains fundamental to Australian national identity. Ours is a nation where, as the early settlers liked to say, Jack was as good as his master, or maybe better. As one nineteenth century commentator put it, ‘In England the average man feels that he is an inferior, in America that he is a superior; in Australia he feels that he is an equal. That is indeed delightful’.[8] Mark Twain saw it, Anthony Trollope saw it, DH Lawrence saw it; it wasn’t a dream and we didn’t make it up.

Egalitarianism is a regular feature of speeches by my Labor colleagues. Michelle Rowland sums up Australia as ‘prosperous, free, and instinctively egalitarian’.[9] Bill Shorten has noted that ours is a country where ‘the welfare of the weakest and the welfare of the most powerful are inseparably bound together’.[10] Andrew Giles warns that we must not ‘return Australia to a gilded age of inequality, whereby if you are not born into wealth, the game of life is rigged against you.’[11]

As Penny Wong notes, ‘a critical ingredient for a fairer society is equality of opportunity’.[12] Brendan O’Connor points out that ‘The idea that inequality is the price of growth, that prosperity and equality are alternatives, is just not borne out by a calm examination of the evidence.’[13]

Others have noted the intergenerational consequences of inequality. Pat Conroy says: ‘I have a one-year-old daughter, and I want her to grow up in a society that is fair and equitable, where she has the best chance of advancing, based on her hard effort and her intelligence—not on the size of the bank balance supporting her.’[14] Jim Chalmers succinctly points out that ‘inequality in one generation breeds inequality in the next’.[15]

Tanya Plibersek draws attention to the global ramifications of inequality. ‘There is the simple idea that we should, where possible, work to eliminate some of the most dire forms of inequality that exist in our world. This speaks to something larger than a mere policy difference. We see a role for government in tackling inequality, whether it be at home or abroad.’[16]

Inequality need not be an issue just of the left. And yet I searched in vain for a single comment of this kind from one of my colleagues on the right of politics.

It wasn’t always that way.

A century ago, Republican President Theodore Roosevelt told an audience in Kansas ‘The absence of effective … restraint upon unfair money-getting has tended to create a small class of enormously wealthy and economically powerful men, whose chief object is to hold and increase their power.’[17]

Even as recently as June 2000, The Australian published a week-long series on inequality. Its lead editor, Paul Kelly, argued that ‘Inequality in Australia today is a serious social issue’.

But a decade and a half on, with inequality higher still, there is little evidence that those on the right take inequality seriously. Prime Minister Abbott’s view is that ‘In the end we have to be a productive and competitive society and greater inequality might be inevitable’.[18] His handpicked business adviser, Maurice Newman, believes that we shouldn’t talk about inequality because ‘Words such as equality and egalitarian have become a refuge for bad policy’.[19] Christopher Pyne has stated baldly ‘I don’t believe there is an equity problem in Australia’.[20] And in response to NATSEM modelling showing that his budget made poor single parents 11 percent worse off (and rich singles better off), Joe Hockey described his critics as engaging in ‘1970s class warfare’ and ‘old style socialism’.[21]

Every time I hear someone on the right criticising talk of inequality as ‘class warfare’, I think of Warren Buffett’s response: ‘There’s class warfare, all right, but it’s my class, the rich class, that’s making war, and we’re winning.’

We need a deeper conversation about inequality. I say to my Coalition colleagues: if you would like to engage in a serious evidence-based debate about inequality, just name the time and place. With Australian inequality as high as it has been in three-quarters of a century, we cannot afford to have the nation’s conservatives shouting slogans; we need them engaged in the discussion about how much inequality our social fabric can bear.

What is to be done?

If you accept the argument that inequality matters, what should we do about it?

The first answer is that we must increase the quality and quantity of education in Australia. Harvard’s Claudia Goldin and Larry Katz argue that we should regard inequality as a product of a race between education and technology.[22] At times when education expands rapidly, egalitarianism flourishes. But when technology advances while education stagnates, inequality increases. Boosting educational attainment means making it easier for students to attend and complete vocational training and university, and improving the quality of school teachers and university academics. As Bill Shorten puts it, affordable and accessible education boosts social mobility.[23]

The typical worker earns between $1 million and $5 million over a lifetime. This means that for most people, the most valuable thing they own isn’t their house, it’s their human capital. Economists aren’t much good at predicting precisely which occupations will grow and shrink over future decades, but we can be pretty confident that there will be more jobs for people with diplomas and degrees, and fewer jobs for those who didn’t finish high school.

Second, we need to do a better job of evaluating social policies. At present, too many such evaluations are themselves B-grade, C-grade or worse.[24] Testing new social policies by means of medical-style randomised trials would provide better information about what works. At present, randomised trials are compulsory for pharmaceuticals, but almost non-existent for social policies.[25]

Raising the evidence bar isn’t just about a better feedback loop; it also embodies a more modest approach to politics. If we knew everything about how to help the truly disadvantaged, we wouldn’t have multi-generational poverty cycles, wide educational achievement gaps and a burgeoning jail population. If we believe Australia should be more equal, then we need to combine optimism about addressing the problem with realism about the ability of any particular policy to get there.

Third, Australia must ensure that our tax and transfer system works to reduce inequality. Historically, as Chris Bowen has noted ‘Australia’s welfare system can be regarded as among the most efficient in the world.’[26] The average advanced country gives twice as much welfare to the bottom fifth of the population as to the top fifth, while Australia gives twelve times as much to the poor as to the rich.[27]  

But this is a political choice, not a guaranteed outcome. Under the Howard Government, the redistributive effect of government payments declined by one-quarter.[28]

During our two terms in office. Labor chose a different path. The National Disability Insurance Scheme recognises what Bill Shorten – quoting Gough Whitlam – calls the ‘inequality of luck’ for people with a disability.[29] I am pleased to see that the NDIS now enjoys bipartisan support. But no-one should be in doubt that it required a Labor Government to bring the NDIS into existence.

Labor also chose to reduce inequality by focusing on the neediest. In 2007, the single pension was worth two-fifths of the median income. Using the half-median-earnings benchmark that is often defined as being in poverty, this meant that if you got just the single pension, you were in poverty. Two years later, Labor increased the pension to over half the median income, the largest increase in a century. As Jenny Macklin has pointed out, the effect of this was to move a million pensioners out of poverty.[30]

It’s easy to talk in banal generalities about means-testing, but the acid test is how you respond when a particular means-test debate comes before parliament. When Labor means-tested the Baby Bonus to exclude the top 6 per cent of families, Malcolm Turnbull called it ‘an appeal to Labor’s divisive envy politics’.[31] After Labor froze indexation on a Family Tax Benefit supplement and scaled back the Dependent Spouse Tax Offset, Joe Hockey said ‘I despise this envy; this envy and this jealousy.’[32] When the Baby Bonus was scaled back for second and subsequent children, Christopher Pyne called the decision ‘vicious and savage’, while Hockey compared it to China’s One Child policy.[33] By contrast, Labor has supported a number of the Abbott Government’s means-testing decisions, even in cases where we believe the policy could have been better designed.

Over the course of 2015, Labor will have much more to say about how we believe the budget should be shaped. But let me simply point to one issue within my portfolio: multinational profit-shifting.[34] In its first year in office, while cutting the pay of people who clean their offices, the Abbott Government gave $1.1 billion back to multinational firms – no strings attached. These firms, some with multi-billion dollar profits, did not need a tax handout from the Abbott Government. In fact, it’s probably fair to say that they needed a tax break about as much as Prince Philip needed a knighthood.

Egalitarian to the Core

Australia’s egalitarian spirit shows up in unexpected places. Writing in the Australian Financial Review, the entrepreneur Christopher Joye argued that the competitive nature of sport proved Australians didn’t believe in inequality. ‘We do not handicap an athlete,’ Joye argued, ‘because they are abnormally fast.’[35] But it turns out that this is exactly how our sports often operate. Many Australian team sports have salary caps, while many individual sports have handicap systems. As any golfer can tell you, handicaps make the game more fun, because they allow people of different abilities to compete with one another.

We don’t just handicap sportspeople. Australia’s favourite horse race, the Melbourne Cup, literally puts lead in the saddlebags. Horses must carry at least forty-nine kilograms, and racing historians celebrate Carbine, who won the 1890 Cup with a whopping sixty-six kilograms. Extra weight is put on horses that have already performed well. By contrast, America’s most famous race, the Kentucky Derby, does not add weight based on a horse’s past performance.[36] The Melbourne Cup is a more egalitarian race than the Kentucky Derby.

No-one is arguing that we should put lead in the saddlebags of the most successful Australians. But in the great Australian foot-race, isn’t it time to consider buying a pair of shoes for the barefoot kid up the back of the pack?

Our egalitarian spirit helped make Australia a stable, cohesive and prosperous nation over the past two centuries. We still have this ethos strongly present in our society, even as inequality has risen starkly and significantly in the past generation.

Egalitarianism is a value that runs deep in the Australian popular psyche, with undeniable origins in our history and culture and undeniable continued appeal in our democratic society. 

But I worry that unless we consciously re-focus on equality as our shared goal and egalitarianism as our common value, Australia will sleepwalk into a more unequal and divided future. That we will find ourselves split into ‘Two Australias’.      

Australians have expressed a strong preference for egalitarianism. We know from the evidence that a more equal society is a more mobile society. To achieve it, we need a government that will put fairness at the heart of policymaking. A government that will be – as Australia is – egalitarian to the core.