RDP 2015-15: Household Economic Inequality in Australia 6. Conclusion

We document some new facts about economic inequality among households in Australia over recent decades. We find that consumption inequality is lower on average than income inequality due to the ability of households to smooth consumption by borrowing and saving. Income and consumption inequality have both increased a little since the early 1990s, but income inequality has risen by slightly more. These findings are in line with the changes in income and consumption inequality documented in other developed economies.

We also provide new estimates of household-level income dynamics for Australia. The broad trends in consumption and income inequality do not appear to be due to changes in observed household characteristics, but rather to changes in the distribution of unobserved shocks. The increase in income inequality over the past decade has reflected similar-sized increases in the variance of transitory and persistent income shocks. The rise in persistent income inequality since the middle of the 2000s is consistent with the rise in consumption inequality over the same period.

Our results also suggest that monetary policy can affect inequality to the extent that changes in interest rates influence asset prices, and such interest-sensitive assets are not distributed equally across the household population. But our results also indicate that the direction of these effects is unclear a priori. For instance, lower interest rates may lead to higher housing prices which, in turn, boost wealth inequality given that wealthy households are more likely to own their homes. But if income and spending are adjusted to account for imputed rent, our results also imply that lower interest rates could boost imputed rent (relative to market rents) and disproportionately benefit relatively low-income home owners, reducing measured inequality in income and consumption, at least in the short term.