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We can't blame CEOs for the rich-poor divide

June 9, 2004

The gap between high and low incomes is growing - but not for the reasons you'd think, writes Ross Gittins.

According to a recent Roy Morgan poll, 88 per cent of people believe the gap between rich and poor is growing. They're right, it is. But my guess is that 88 per cent of people have the wrong reason for believing the gap is growing. It's a tricky story, which economists are still getting to the bottom of.

For a start, it hasn't always been true. Between the end of World War II and the mid-1970s, the gap between rich and poor grew narrower. Since then it's been getting wider again.

The changes governments make to taxes and benefits - the Hawke government's big cut in the top rate of income tax, the GST, John Howard's latest tax cut limited to people earning more than $52,000 a year, or his repeated increases in family benefits, for instance - attract a lot of debate about whether they favour high- or low-income earners.

But though such changes can influence the position a little - for good or ill - they're not the basic factor affecting the gap between rich and poor.

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No, the fundamental cause of inequality in our society is our market economy. Some people earn a lot more "market income" - the income you have before governments swing in with their taxes and benefits - than others.

Some people earn income from the assets they own - shares, businesses, bank accounts, property. But the great bulk of market income comes from the sale of our labour.

It's the change in market income - and, in particular, income from wages and salaries - that does most to explain the widening gap between high- and low-income earners.

Ah, yes, all those CEOs giving themselves obscene pay rises, right?

Wrong. They're part of it, but only the tiniest part. They just get all the publicity. The growth in the incomes of the handful of people at the top of each of our 200 big public companies isn't nearly sufficient to have a material effect on the distribution of income between 20 million people - 9.7 million of whom have jobs - grouped into 10.2 million income-sharing units (families and singles).

Consider these figures for Australian men with full-time jobs, with all the men arranged in order from lowest wage to highest wage. In 1985, the man who was 10 per cent up from the bottom was earning 70 per cent of what the man in the middle was earning. By 2000, that man was earning 62 per cent of what the bloke in the middle was getting.

Now let's look at the man 10 per cent down from the top of the distribution of wages. In 1985, he was earning 62 per cent more than the man in the middle. By 2000, a man 10 per cent down from the top was earning 76 per cent more than the bloke in the middle.

It was a similar story for women with full-time jobs. So you see how the gap has widened. Compared with the middle (median) income, the incomes of men or women near the bottom have fallen by 10 per cent, whereas the incomes of those near the top have risen by 6 per cent.

This is where it gets tricky. Looking at those figures, you'd immediately assume that the wages of the more highly skilled, highly paid workers must have been growing at a faster rate than the wages of the less skilled, more lowly paid workers.

And if this were America, you'd be right. But it hasn't happened in Australia. Pioneering research by Dr Michael Keating of the Australian National University has shown that the wage rates of different occupations have increased by pretty much the same percentage.

No, what's changed is the number of workers in highly paid jobs relative to the number in lowly paid jobs.

Over the 11 years to 2000, the total number of full-time jobs for men grew by a quite pathetic 5 per cent. Within that small overall growth, however, there was a marked change in the "mix" of jobs.

The number of people in professional occupations grew by 27 per cent and the number of associate professionals grew by 26 per cent. The number of managers grew by 12 per cent.

Against that, however, the number of tradesmen fell by 7 per cent, the number of labourers fell by 11 per cent and the number of men in elementary clerical or sales positions fell by 14 per cent.

Full-time jobs for women grew by 17 per cent overall. But the pattern was the same: big growth in the number of highly skilled jobs, but big falls in the number of less skilled jobs.

You see from this just how much the number of highly paid jobs has increased while the number of lowly paid jobs has fallen.

That's full-time jobs. While full-time employment grew so weakly, the number of part-time jobs grew by half. Not all, but most of these new jobs were relatively lowly skilled and lowly paid. And more than 60 per cent of them went to women.

It thus seems that the greatest single cause of the widening gap between high and low incomes is a little-noticed but profound shift in the composition of our workforce.

We now have a lot more highly skilled, highly paid full-time jobs, but a lot fewer less-skilled full-time jobs. Where there has been growth in less-skilled jobs, they've mainly been part-time and casual.

Obviously, some individuals and families have done well out of this shift, while others have done badly. The gap between the employment-haves and employment-have-nots has widened.

Why is the structure of the workforce changing so dramatically? Not because of globalisation. All industries are affected, not just those exposed to international trade. It's technological change - change in what our workers produce (more services relative to goods) and in the way they produce it (more brain, less brawn).

Pretty much the same technological change is occurring throughout the developed world, but our labour market is responding in its own way: little change in wage rates, but big changes in the quantities of particular types of labour being demanded.