Claims that rising inequality is driving populism overlook the evidence – stagnant wages and falling living standards are the more likely cause.

Populist prejudices and demands are too often a threat to our democratic values and social cohesion. Allan Patience is right when he writes in a recent article, that we need to better understand what motivates populism if we are to respond effectively to it.

However, Patience then goes on to assert: “the most devastating motivation arises from the rapid growth in socio-economic inequality in all of the so-called ‘advanced’ economies. This is true of Australia where inequality has grown exponentially over the past four or so decades”.

Patience follows with the further assertion that this rise in inequality is due to the hollowing out of Australia’s economy through deregulation, privatisation and unparalleled levels of profiteering and rent-seeking by corporate bosses and their political accomplices, etc. etc. Finally, he lists a series of economic policy-making failures since the 1980s that he asserts “are exacerbating socio-economic inequalities in Australia today, producing a new kind of lumpenproletariat – an underclass of misinformed, disenfranchised people”.

My problem with all these assertions is that Patience provides literally no evidence which links increasing inequality with the rise in populism. Equally missing is any evidence or discussion of why inequality has increased and when.

In this article, I will discuss why and when inequality increased and why that is not the main cause of the rise in populism. Instead, I think the evidence is that it is the stagnation of real wages which has given rise to increasing populism, but in Australia’s case at least, that wage stagnation is not related at all to any increase in inequality.

Why and when did inequality increase?

In our book, Fair Share, Steven Bell and I discuss the findings from the extensive international literature and statistical evidence which explores the increase in inequality that started in the late 1970s or early 1980s – depending on which country.

In all countries there is widespread agreement that the increase in inequality was mainly driven by technological change, principally in the form of automation. During the 1980s, 1990s and 2000s, technological change hollowed out middle-level jobs throughout the OECD. That change in the job distribution then automatically showed up as an increase in inequality everywhere. Globalisation also played a role, but it was much less important.

What is equally important, however, is how different governments responded to the hollowing out of middle-level jobs caused by technological changes. The extent of any rise in inequality in response to technological change depends on the labour market and especially how relative wages in turn respond.

In the US, for example, the cost of getting a university degree meant that over this period of three or four decades the number of graduates stayed the same, while the wage premium for a graduate doubled. On the other hand, the relative wages of less-skilled labour fell, with Nobel Prize winner, Joseph Stiglitz finding in 2015 that “the typical American man makes less than he did 45 years ago (after adjusting for inflation)” – a complete denial of the American Dream.

By contrast, in Australia, governments supported the expansion of higher education and training, so the number of graduates doubled while the graduate wage premium hardly changed. More generally, wage relativities have not changed much in Australia over the last 40 years or so.

The consequence was that inequality rose by much less in Australia than in America. Also, although middle-level jobs have been hollowed out, the real wages and living standards for those in employment largely rose, and rose for everyone at much the same rate, over time.

However, since the Global Financial Crisis in 2007-08, productivity growth has slowed everywhere, including Australia, and that has slowed real wage growth. Furthermore, in Australia productivity is still lower today than it was back in 2019, just before Covid, and as would be expected, real wages are also lower.

Interestingly, the obvious explanation for lower productivity growth since the GFC is that technological progress has also slowed. Furthermore, that would be consistent with the finding that that inequality has not risen since the GFC in 2007-08. Thus, according to ABS data, the standard measure of inequality – the Gini coefficient for equivalised disposable household income –  was 0.336 in 2007-08, compared to 0.333 in 2013-14 and 0.324 in 2019-20 (the latest year for which data are available, with a fall in the Gini coefficient indicating a decrease in inequality).

So why has populism risen?

Contrary to Patience’s assertions, the rise in populism cannot be blamed on government policies.

In particular, investment in human capital and increasing the education and skills of the workforce is critical to both realising and sharing the potential benefits from innovation and technological change. And the evidence is that Australia has done quite well in this regard.

For example, the proportion of Australians with a tertiary qualification increased quite rapidly during the years of most rapid technological change. More specifically, this proportion rose from 27 per cent in 2000 to 43 per cent in 2015, and it was not just an increase in qualifications for young people. Over that 15-year period from 2000, the proportion of those aged 25-34 with tertiary qualifications rose from 31 per cent to 48 per cent, and even for those aged 55-64, the proportion with tertiary qualifications also increased substantially from 19 to 34 per cent.

Nor has government gotten smaller, whatever the rhetoric of conservatives. In last year’s Budget, Australian Government Payments were projected to be 27 per cent of GDP. Except for a couple of Budgets during Covid, this is the highest since the first years of the Hawke Government. On the other hand, neither did Australian Government Payments ever get very low, representing as much as 24 per cent of GDP in the last year of the Howard Government, and almost always higher ever since.

So if we can’t blame governments for the rise in populism, what is the explanation. Nor can we blame inequality, as inequality has not increased in Australia during the last 20 years, which is well before populism went up and One Nation’s vote started to rise.

Instead, the most likely explanation for the rise of populism is the decline in living standards since Covid that so many of these relatively uneducated and unskilled workers have experienced. Indeed, when we look at the timing of when populism started to rise, it largely coincides with when real wages and living standards started to stagnate or even fall.

Thus, in America Trump’s MAGA movement was big enough more than ten years ago to get him elected in 2016, but the real wages of many Americans had been stagnating for quite a long time by then. The same association between wage stagnation and the rise of populism seems to be equally true for European countries like Britain, France, Italy and Hungary.

In contrast, in Australia real wage stagnation is much more recent, and most probably that is why the surge in support for One Nation is only very recent also, and much later than in these other advanced economies. The problem is that the cure depends on increasing the rate of productivity growth, but that mainly depends on increasing innovation and technological progress. So governments must ensure that the benefits of technological progress are fairly distributed.