Economic and Social Costs of Inequality in Australia

Analyse the economic and social costs and benefits of inequality in distribution of income in Australia.

Income inequality describes the extent to which income is distributed unevenly among residents of an area. High levels of inequality indicate that a small number of people receive most of the total income, and that most people receive only a small share of the total. There are many advantages and disadvantages associated with the inequitable distribution of income.

Income inequality can lead to an increase in the productive capacity of resources and so an increase in real GDP per capita. Economic benefits are mainly derived from the incentive effects of inequality. Firstly, inequality encourages the labour force to increase education and skill levels where, as long as low-income recipients can afford to pay for education and training, income inequality may encourage an increase in the quality of the labour force. Also, inequality makes the labour force more mobile as the use of higher incomes can act as an incentive to encourage labour to move to where it’s most needed. A more mobile labour force will lead to a more efficient allocation of resources and a higher rate of economic growth. Finally, inequality creates the potential for higher savings and capital formation because greater income inequality should encourage increased savings in the economy because of the greater number of higher income earners. These increased savings should reduce Australia’s reliance upon foreign capital by providing funds for investment.

However, there are several economic costs that derive from inequality. Primarily in the fact that it reduces overall utility because people on higher incomes gain less utility from an increase in income than people on lower incomes e.g. as more of a good is consumed it will provide progressively less utility to the consumer. On another serious economic cost, inequality can greatly reduce economic growth as low income earners spend a