Andrew Leigh

Getting off Struggle Street - how we can tackle Australian inequality

Speech to the Financial Counselling Australia Annual Conference

Canberra

Thank you to Lauren Levin, Fiona Guthrie and all the friends at Financial Counselling Australia for inviting me to share in your conversation today. Lauren was the one who first made contact with me about this conference, and her email really grabbed me from the opening line. Never before have I received an email that began: ‘It is most unusual to be de-funded and still continue with a major conference.’ So when I received that email from Lauren, of course I couldn’t resist saying yes to speaking today.

I understand that only today there has been some good news, and FCA has now secured funding to cover your work for the next two years. The Abbott Government has made quite a habit of changing its mind recently, but I’m very glad that in this case it has had such a good outcome. I’m sure that this reversal was in no small part due to the powerful advocacy of Carmel Franklin from CARE Financial Counselling in the ACT. Those of you who know Carmel will know that she’s a strong and consistent voice speaking on behalf of your sector and the Australians you work with.  

I don’t know about all of you, but I’ve been glued to my TV the last couple of Wednesdays watching Struggle Street on SBS. That documentary kicked off a noisy media discussion about whether its presentation of the participants was ethical, and whether it was inviting us to look inside their lives, or simply look down on them.

Watching the show, it struck me that there was something much more important that we should have been up in arms about: the presence of such deep and entrenched inequality in a prosperous country like Australia. That show vividly portrayed the gap that has opened up in our community in recent decades, and showed just how far some have fallen behind as Australia’s richest have raced ahead.

You have come here from all over Australia and I know that in your daily work, you regularly encounter people like those whose stories were told in Struggle Street. People like Ashley and Peta Kennedy – really struggling to keep their home and their family together after losing work and facing major health problems. Young single parents like Erin Rideout – trying to support themselves while training for a better job and a brighter future.      

And because you meet these people all the time, you know that Struggle Street isn’t just a place in Mount Druitt. There are people struggling down the street from us here in the centre of Canberra and right across Australia. From old manufacturing hubs like Elizabeth in South Australia and Williamstown in Victoria, to industrial centres like Gladstone and Newcastle, and even in our inner cities, there are people who have been left behind by Australia’s rising prosperity.

What has happened to inequality in Australia?       

Over the past few decades, there has been a rise in the share of people living on less than half the median household income – a rise in relative poverty.

The income share of the top 1 percent has doubled. The income share of the top 0.1 percent has tripled.

Cumulatively, the increase in the affluent share over the past three decades represents a $403 billion shift from the bottom 99 per cent to the top 1 per cent.

It’s not just income. Wealth inequality has increased too. The top 1 percent’s wealth share has gone up significantly since the 1970s.

The wealth share of the top 100,000^th of the population (approximately the top 200 people) has tripled since the mid-1980s.

Today, the richest 50 people in Australia have more wealth than the bottom 2 million.

The richest 3 people in Australia have more wealth than the bottom 1 million.

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.

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. 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’.

One final 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. 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.

So we know that Australians want to be more equal than we currently are, and that over time inequality affects all of us by making our society less mobile. I want to talk now about a particular group within the community who demonstrate what a damaging cycle entrenched inequality can create: prisoners.

Inequality before, behind and after bars

Over the past 20 years, there has been a significant increase in incarceration rates in Australia. In 1991, we imprisoned 117 people for every 100,000 adults; today that figure is 172 per 100,000. It is also well known – although sadly, little acted on – that Australia’s Indigenous incarceration rate is far higher. Over the past 20 years the Indigenous incarceration rate has increased by about 30 per cent. Today, 2,303 out of every 100,000 Indigenous adults are behind bars.

Decades of research have firmly established a relationship between contact with the justice system and social disadvantage. People dealing with poverty, unstable home lives and addictions are much more likely to have run-ins with the police and the courts, and more likely to experience adverse consequences such as imprisonment when they do.

As Russell Marks explored in his recent book ‘Crime and Punishment’, one particular problem for those at the bottom of the wealth and income distribution is fines: parking tickets, toll road late-payment notices, penalties for riding public transport without a ticket. For someone living payday-to-payday, paying a $97 parking fine is generally a lower priority than keeping the lights on or having enough to eat. But when unpaid fines start to mount up, suddenly people find themselves coming into contact with the courts.

A number of states across Australia use what’s known as ‘imprisonment in lieu’ orders, and this can be a disaster for disadvantaged Australians. As Marks describes it: ‘if they miss a single payment by a single day or a single dollar, a warrant is issued for their arrest and they’re taken directly to jail to ‘pay off’ their fines by doing time.’ 

Sometimes the consequences of this are deadly. In 2014, a 22-year-old Indigenous woman known only as Ms Dhu died in a West Australian police lock-up while serving time in lieu of a $1,000 fine. That is nothing short of a tragedy and a disgrace.

Thankfully, cases like this are reasonably rare. But the practice of serving jail time in lieu of fines is anything but. In Western Australia, 15 per cent of all new admissions to prison are now for fine default. In that same state, the number of Indigenous Australians going to jail for unpaid fines increased by almost 500 per cent between 2008 and 2013 alone.    

It is bad enough that these Australians should be deprived of their liberty for such trivial civil offences. But as many of you would be all too aware, people who go to jail to pay off fines often then find themselves trapped in a vicious cycle of diminished opportunity that deepens their disadvantage.

That was the experience of Jenny*, who told her story to The Australian’s Paige Taylor earlier this year. She handed herself in for a prison stint after accumulating $18,000 in unpaid fines for driving without a licence and other offences. She served three weeks in Perth’s Bandyup Women’s Prison after trying, and failing, to work off those fines through community service. As Jenny said: ‘In a way it’s ok because I don’t have that hanging over me now. But I can’t get a job because of my record.’ 

I can’t get a job because of my record. This is a woman who came into contact with the justice system because she was too poor to pay her fines. Her time in jail means she is now likely to remain poor into the foreseeable future, denied the opportunity to work or improve her circumstances. If she has kids, they’ll be tipped into poverty alongside her – embedding disadvantage down the generations.

Surely we can do better than this in a prosperous, generous nation like Australia?

What can be done?

I wouldn’t blame you for feeling a bit dispirited after hearing so much evidence about the inequality gap in Australia today, and its impact on people like Jenny and Miss Dhu. But I genuinely believe it is possible to roll back rising inequality and disrupt these cycles of entrenched disadvantage.

Here are just a couple of the priorities I believe my party – and governments of all persuasions – should be focused on to shrink the gap between the rich and the rest.

First, 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. 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.

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, 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.’ 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.  

But this is a political choice, not a guaranteed outcome. Under the Howard Government, the redistributive effect of government payments declined by one-quarter. During our two terms in office, Labor took a different path. We chose to reduce inequality by focusing on the neediest. For example, 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.

Finally, 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. 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.

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.

In wrapping up, I want to take this opportunity to thank all of you for the role you play in fighting inequality across Australia. Helping people get out of debt, improving financial literacy, advocating on behalf of disadvantaged Australians – you are on the front line every day working to overcome the practical consequences of inequality. My Labor colleagues and I understand that you can’t fix it all alone – we need a concerted national effort that draws on your insights to drive policy change and come up with practical, proven initiatives.

Australia has been more equal in the past and we can be more equal again in the future. Creating a more equal Australia is both a challenge to our political system and a test of our national character – I don’t believe we’ll fail it.