Distribution of Income

Last Updated:

2011

Update Frequency:

Census every 5 years

Indicator Rationale

Economic well being is a crucial element that contributes to quality of life because most basic needs such as food, water, shelter, health care and many forms of recreation have to be purchased (ABS 1999a). However, quality of life is not based solely on income and wealth, rather it is an integration of social, environmental and economic factors.

Measures of income levels does not necessarily account for the way in which income is distributed amongst the population. For example, income increases concentrated in a small sector of the population (e.g. CEOs) do not translate into an increase in the standard of living for the general population even though there has been a rise in average weekly earnings. It therefore becomes important to have a measure of dispersion for both income and distribution.

Data Source

Australian Bureau of Statistics 2006 Census, data available on request.

Measures

P80/P20 Ratio of Equivalised Gross Weekly Household Income.

Equivalised household income can be viewed as an indicator of the economic resources available to a standardised household. For a lone person household it is equal to household income. For a household comprising more than one person, it is an indicator of the household income that would be needed by a lone person household to enjoy the same level of economic wellbeing.

It is derived by calculating an equivalence factor according to the 'modified OECD' equivalence scale, and then dividing total household income by the factor. The equivalence factor is built up by allocating points to each person in a household (1 point to the first adult, 0.5 points to each additional person who is 15 years and over, and 0.3 to each child under the age of 15) and then summing the equivalence points of all household members.

P80 is equivalised gross weekly household income at the top of the 80th percentile, and P20 is equivalised gross weekly household income at the top of the 20th percentile. These two income values have also been expressed as a ratio with P50 (equivalised gross weekly household income at the top of the 50th percentile - the median value).

In the 2006 Census, information sufficient to determine their household income was not obtained from 11.1% of households (varying between 9.1% and 13.4% in individual LGAs). These households were excluded from the population prior to the calculation of percentile values.

Census Questions

The data have been derived from the Household Income census variable.

Household Income was derived from the responses of each household member aged 15 years and over to the Individual Income question (Question 33) on the 2006 Census form: What is the total of all wages/salaries, government benefits, pensions, allowances and other income the person usually receives?

Individual income was collected in ranges, so before these can be summed to a household level, a specific dollar amount needs to be imputed for each person. Median incomes for each range, derived using data from the 2003-04 Survey of Income and Housing, are used for this purpose. This method gives the best practical approximation that results in the majority of households being included in the same household income range (census output categories) as they would have had individuals reported their incomes in dollar amounts rather than in ranges.

Each percentile value after equivalisation is based on an interpolation between the upper and lower bounds of the range containing the percentile household. This interpolation makes the assumption that households within the percentile range are evenly distributed along the range, so care should be exercised in the use of the derived ratios. The income ranges on which the ratio denominators are based are also very wide, which can make ratio analysis very difficult to interpret.

The imputation used in deriving household incomes is also likely to understate some household incomes - for lower household incomes in general, but particularly for single income households.

References

Melbourne Institute (2006). Household Income and Labour Dynamics Survey (HILDA).

Long, S. (2004). New research finds skewed distribution of wealth in Australia. Transcript from the World Today, ABC radio, April 23, 2004.