Wages determined by labour market- Labour market institutions are a crucial determinant of wage inequality

Wages determined by labour market-
Labour market institutions are a crucial determinant of wage inequality, the wage share in aggregate income, and the unemployment rate. These variables affect, in turn, the distribution of income across households within the Australian economy. Labour earnings represent the largest component of income for most Australians, as of 2017 wages and salaries represented 55% of household income, and are a fundamental cause of income inequality. Unlike equivalised disposable household income, labour earnings inequality has been declining within Australia at a household level since 1998-99. This is because greater access to and participation in the workforce at the low end of the income distribution has more than offset the disproportionate increase in wages at the top.

There is presently inequality in the distribution of income and wealth between those who are employed and those who are not. The current unemployment rate within Australia is 5.7% (2018) with approximately 730 000 Australians unemployed. The underemployment rate is 9.3%, which is the second highest on record and currently one in five prime-age males are not employed, leading to greater inequality in distribution of income within the economy. Public policy to encourage employment and respond to such economic shortcomings includes: the decentralisation of wage and award bargaining, lowering the minimum wage (to be replaced by a wage subsidy if needed), and lowering and flattening income taxes and reducing transfers to lower effective marginal tax rates.

Public versus Private Sector Employment-
There is inequality in pay between those who work in the private sector and those who work in the public sector. Public sector wages have grown 10% faster than private sector wages over the past two decades. Job security is also generally higher in the public sector, and so the risk-adjusted wage differential between public and private sector is even higher, leading to greater inequality in the distribution of income and wealth within Australia.

Cyclical conditions-
The economy has been an imperative factor in driving change within income inequality. Employment growth has effectively reduced wage income inequality, while growth in investment income has tended to largely increase income inequality (particularly for groups such as retirees where investment income can be significant).

Education, qualifications and skills-
The income of an individual is often directly proportional to their level of education and the skills and qualifications they possess- generally, people who have completed tertiary studies and possess a university degree are more likely to be employed within the professional sector, earning a higher income than those employed as labourers and tradespersons with no background of education. Also, the more qualifications an individual has, the more likely they are to be employed within a professional firm and the higher their average earned income. The distribution of income according to occupation reveals large variations in incomes between highly skilled and lower skilled occupations- Managers and professionals earnt an average of between … and… per week in 2017, compared to labourers, clerks and tradespersons who earnt an average of between … and … per week.

In terms of age, young males and females earn less income than older adult males and female workers. Income for males and females increases proportionally to their level of experience and skill within their respective industry, and is at a maximum in the 35 to 54-year age group.

In terms of ethnicity, persons born overseas earn higher incomes than those born in Australia and persons from non-English speaking backgrounds earn less than those from English speaking backgrounds. The period of residence of migrants also influences their level of income, with migrants residing in Australia for longer periods of time earning higher incomes than migrants residing for less time. Also, the country of origin of migrants is correlated with income- migrants from advanced economies (USA, Britain, New Zealand) earn higher incomes than those from developing countries (Iraq, Lebanon, Indonesia). Indigenous Australians earn considerably less income than non-indigenous Australians, and are amongst the lowest income earners in the Australian community, with many being reliant on government welfare payments for income.

Family structure-
Households range from lone persons, to couples with dependent children, couples without children, single parents with children, elderly couples, and elderly single people. Households in the lowest quintile, by equivalised disposable incomes, consist of mainly lone persons (either young or elderly), single parents with children and elderly couples without dependent children. In comparison, households in the highest quintile tend to be couples with or without dependent children. Most of these couple households have two income earners, with the principal source of income being wages and salaries.

Asset fluctuations-
Public policy has been a major driver of the increase in wealth inequality. The highest quintile, wealthiest 20% of households within Australia, presently account for 60% of total household net worth, whereas the lowest quintile, poorest 20% of households, accounts for only 1% of the total net worth. Asset price fluctuation within the nation in general, and of housing in particular, has been the single most important factor contributing to growing wealth inequality. Low interest rates since 2011 have encouraged investment in assets- including company shares, whilst a high immigration program and policies which restrict housing supply have caused residential property prices to rapidly surge, increasing by approximately 110% in Sydney over the past decade.