Jinjing Li, Hai Anh La, Denisa M. Sologon
Crawford School, Australian National University
Income inequality as well as the role of tax-benefit system in mitigating inequality in Australia has attracted the attention of the public and academic literature throughout the past decade. While the inequality itself in Australia has not changed dramatically over the past decade, several factors such as the financial crisis have contributed to the fluctuations in inequality with varying degrees. There are very few studies investigating the factors driving changes in income inequality over a given period. These studies only examine the changes between two points of time: the beginning and the end of the period, which might over- or under-estimate the role of policy reforms and their results tend to very sensitive to which year is selected to study. In this paper, we examine the effect of four main components (policy, market income, demography and the other) on year-over-year changes in income inequality in Australia between 2002 and 2016 by using the HILDA surveys and extending the decomposition framework suggested by Bargain and Callan (2010) and Biewen (2012).
The decomposition separates the contribution of each factor by comparing the current income distribution with the one calculated in the counterfactual where marginal changes in each of the components are introduced. For each counterfactual, the paper uses the tax-transfer STINMOD+ model to simulate the household disposable income based on the corresponding tax and social transfer rules in Australia. Our decomposition framework also incorporates a flexible non-parametric market income model which captures better the demand side shock rather than a standard parametric model. Our paper also extends the research period, covering both pre- and post-financial crisis. Other studies in Australia only focus on the period before 2008.
Our results suggest that the main driver of the inequality in Australia over the past decade is market income for most segments of the income distribution. Demographic factors, on the other hand, are consistent factors that reduces income inequality. Policy factors also have a moderate impact in improving the equality in overall. Its contribution should be larger without the 2006 tax reform. Compared to demographic factors, policy reforms play a more important role for the lower income earners after the financial crisis, mostly from the 2009 pension reform.