What is equity economics?

Economists often refer to the trade off between efficiency and equity in policy making. In economics, efficiency tends to refer to optimising the allocation and production of resources whereas equity refers to the distribution of those resources. Achieving one of these goals can often come at the cost of the other.

Not all economists agree on the importance of equity or distributional outcomes in policy making, particularly when it comes to its contribution to economic growth. While debate on this point will continue, understanding the distributional impacts of policy decisions is important to understanding the full implications and consequences of policy decisions.

A range of measures are relied upon to determine levels of inequality. Central amongst them is the Gini Coefficient. Income inequality is also commonly used to measure inequality:

Australia:

  • The wealthiest 20% of households in Australia account for 62% of total household net worth, with an average net worth of $2.5 million per household. (Source: ABS Household Income and Income Distribution Survey 2013-14)

  • The poorest 20% of households account for 1% of total household net worth, with an average net worth of $35,600 per household (Source: ABS Household Income and Income Distribution Survey 2013-14).

  • Household income inequality increased in Australia by 10.3% during the period between 1994-95 and 2013-14. About one third of the total increase could be explained by demographic factors such as population ageing. (Source: ABS)

United Stated of America:

  • "In fact, income inequality remains at or near a record level, with the top 5 percent of earners capturing 21.8 percent of total income, compared with the 12.3 percent captured by the bottom 40 percent. Census analysis shows that between 1999 - the year that household income peaked - and 2014, income for the typical household declined by 7.2 percent, while income for households in the bottom 10 percent of the income distribution declined by more than twice that amount at 16.5 percent. Meanwhile, incomes for the top 10 percent increased by 2.8 percent over the same period. Source: Centre of American Progress, Available at: www.americanprogress.org/issues/poverty/report/2015/09/16/121148/3-things-you-may-have-missed-in-the-new-poverty-income-and-inequality-data/

  • "From 1997 to 2007, the share of income accruing to the top 1% of US households increased by 13.5 percentage points. This is equivalent to shifting $1.1 trillion of Americans’ total annual income to these families – more than the total income of the bottom 40% of US households."            Source: Carol Graham (2013) America’s Broken Dream, Brookings Institute,  Available at: http://www.brookings.edu/research/opinions/2013/09/05-america-income-inequality-graham

Global inequality:

  • "Notably, we find that middle-class wealth has grown at a slower pace than wealth at the top end. This has reversed the pre-crisis trend, which saw the share of middle-class wealth remaining fairly stable over time. These results reinforce our findings from last year's edition of this report, which argued that wealth inequality had widened in most countries in the years after the 2008 crisis."  Source: Credit Suisse (2015), Global Wealth Report 2015. Available at: https://publications.credit-suisse.com/tasks/render/file/?fileID=F2425415-DCA7-80B8-EAD989AF9341D47E

Further reading on the topic of equity and economics is provided below. The views are those of the authors.

  • OECD Report (May 2015), In It Together: Why Less Inequality Benefits All. Available at: http://www.oecd.org/social/in-it-together-why-less-inequality-benefits-all-9789264235120-en.htmhttp://www.oecd.org/social/inequality-and-poverty.htm
  • Should Equity Be a Goal of Economic Policy? International Monetary Fund Fiscal Affairs Department, January 1999
  • Why Nations Fail: The Origins of Power, Prosperity and Poverty by Darren Acemoglu and James A. Robinson, 2012
  • Battlers and Billionaires: The Story of Inequality in Australia by Andrew Leigh, 2013
  • Equity and Efficiency Measures of Tax Transfer Systems:Some Evidence for New Zealand, New Zealand Treasury Working Paper 08/04, Published 19 December 2008

The articles are reproduced consistent with copyright restrictions of the website providers listed above. Please refer to the linked website providers for details of the copyright on these articles and restrictions on reuse.