How is income distributed in Australia and how is inequality measured?
Distinguish income from wealth, explain how the Lorenz curve and Gini coefficient measure inequality, and evaluate the causes, effects and policy responses to income inequality in Australia
WACE Year 12 Economics Unit 4 on the distribution of income and wealth: the difference between income and wealth, measuring inequality with the Lorenz curve and Gini coefficient, the causes and effects of inequality, and the policies used to redistribute in Australia.
Reviewed by: AI editorial process; not yet individually human-reviewed
Have a quick question? Jump to the Q&A page
Jump to a section
What this dot point is asking
SCSA wants you to distinguish income from wealth, explain and interpret the Lorenz curve and Gini coefficient, and evaluate the causes, effects and policy responses to inequality. Expect a Lorenz curve interpretation and a short or extended response on the equity-efficiency trade-off.
Income versus wealth
The two are linked: wealth generates income (rent, dividends, interest), and saved income builds wealth, so initial inequality can compound over time.
Measuring inequality
The further the Lorenz curve bows away from the 45-degree line of perfect equality, the more unequal the distribution and the higher the Gini coefficient.
Causes of inequality
- Differences in skills, education and occupation, which drive large wage gaps.
- Ownership of wealth and capital, which generates income and compounds over generations.
- Unemployment and underemployment, which cut household income.
- Technological change and globalisation, which can reward high-skill workers and capital while squeezing low-skill jobs.
- Housing and asset price growth, a major driver of wealth inequality in Australia.
Effects of inequality
Some inequality is widely seen as necessary for incentives: the prospect of higher reward encourages effort, skill acquisition, risk-taking and investment, supporting efficiency and growth. But excessive inequality can reduce social mobility, weaken aggregate demand (lower-income households spend a higher share of income), and create social and political tension.
Policy responses
Australia redistributes income mainly through:
- Progressive income tax, where higher incomes are taxed at higher marginal rates.
- Transfer payments, such as the Age Pension, JobSeeker, family payments and disability support.
- Social wage spending on health, education and public services that benefit lower-income groups most.
These policies reduce measured inequality but involve the efficiency cost above, which is why the level of redistribution is a continuing political debate.