Theory Guest Lecture 3 Welfare in Australia

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Theory Guest Lecture 3Welfare in Australia

• Introductory Economics for the Treasury
• Dr. Paul Frijters

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Outline

• 1. Some background statistics and basic terms
• 2. Questions this lecture

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Population



19.7 million


Workforce age 15
-
64

Non
-
workforce age



67
33



 
 
In workforce

Children 0
-
14

Retirees


75

62
38


Not in workforce
           
           
       
         
25


Voluntary
inactive


Employed

           
           
12

94


Homeduties/


childcare


42

Basic Australian stats

Incapa
c
ity

14


Fulltime



72



Educ
a
tion

23

Partime

28


Other

Unemployed

19


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(a) Some may be in education.


(b) Some sub
-
groups are not exclusive.
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Income terms

• Final income equals the sum of private incomes
  and state transfers.
• State transfers include direct benefits
  (payments) such as disability benefits and child
  payments, and indirect benefits, such as
  education and subsidised housing.

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Overview of income build up
Source Abelson (2003), page 425
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Forms of private income
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Household (final) Income distribution in Australia

Source ABS, Income Distribution Australia, Cat.
no. 6523.0
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Effect of state transfers in 1999
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Preliminary conclusions

• 1. The state is heavily involved in the build up
  of final incomes via transfers (direct and
  indirect benefits minus taxes).
• 2. The big net gainers are the old, lone parents
  (not previously shown) and couples with
  school-going children.
• 3. The big losers in terms of transfers are those
  below 65 without children.

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Age-welfare profiles for men
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Age-welfare profiles for women
Source FACS (1999)
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Conclusion from these stats

• 1. Disability take-up is mostly relevant for
  older workers.
• 2. The net state transfers are made mostly to the
  elderly.

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Disability take-up in the OECD?
Source Frijters and Shields (2003).
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And in Australia?
On disability pension
Facs (Income Support Customers) a Statistical
overview, 1999 and 2000
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Latest data DSP by age in 2003
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Interpretation

• 1. Take-up rates of disability benefits are
  especially high amongst the old both in Australia
  and elsewhere.
• 2. Take-up rates of disability have been going up
  everywhere since the 60s but are stabilising the
  last decade. They are still rising in Australia.
  The current number on DSP is about 700 thousand
  are still rising fast
• How high can DSP go? The 2003 ABS Survey of
  Disability and Health claims there are about 1.3
  million Australians with mild or severe
  disability, which has been constant the last 5
  years. Only half of those are on DSP. The rest
  could possibly claim in the future.

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Questions this lecture

• 1. Measures of Poverty and Inequality?
• 2. What is driving the changing situations of
  older workers?

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Poverty

• - a household is said to live in poverty if its
  material welfare is deemed to be below a poverty
  line.

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Who decides the poverty line?

• The researcher or organisation defining it.

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What types of poverty are there?

• 1. Absolute poverty lines, based on the price of
  a basket of necessary commodities. This is
  chosen in the US. What is considered necessary
  changes year by year and is ultimately decided by
  government.

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..

• 2. Relative poverty lines. Here, poverty is seen
  as having incomes below a certain percentage of
  the incomes of others. This is the Australian
  poverty line, also known as the Henderson poverty
  line. It is currently set at 56.5 of the average
  earnings.

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• 3. Subjective poverty lines. In this approach,
  poverty corresponds roughly to the dominant
  opinion of a group of survey respondents to a
  question like what would you consider the
  minimum total net income needed for your
  household?.

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Common aspects

• - all poverty lines are inherently subjective
  either the expert, the government, or the
  aggregate respondent decides what the poverty
  line is.
• - the percentage with incomes below the line is
  the headcount ratio.
• - inequality and poverty roughly move together
  under all definitions.

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• - dealing with household composition is also
  subjective and usually done ad hoc poverty lines
  are calculated in adult equivalents where the 2nd
  adult is considered to need 70 of the first
  adult and every child needs 40 of the first
  adult.
• - internationally, relative poverty lines are
  dominant (50 of mean or median).

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Inequality measures

• - the most popular inequality measure is the Gini
  coefficient. The higher the Gini, the richer the
  rich and the poorer the poor.
• - the Gini coefficient can be calculated from the
  Lorenz curve, which is the curve indicating the
  percentage of total incomes earned by the poorest
  x of units.

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Gini and Lorenz
Area A Gini coeff. Minimum 0, maximum 1
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Abelson, page 233
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Meaning of terms in this table

• 1. SCV (Squared Coefficient of Variation) index
  is the sum of the squared deviations of the
  income of each individual from that of the
  population mean, divided by the square of mean
  income.
• MLD (Mean Log Deviation) index is the average of
  the log ratios of the income of each individual
  to the mean income.
• 3. Poverty rate (in this table) of household
  with less than 50 of average income.

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Conclusion

• 1. Inequality has been increasing in the OECD in
  most countries from 1975-1995. The indications
  are that poverty has been roughly stable from
  1975-1995.
• 1a. These two seemingly opposite findings hold
  because the rich have been getting richer, whilst
  the middle has roughly remained stable.
• 2. By cherry-picking different poverty measures
  at different times you may claim increasing or
  decreasing poverty rates in particular periods.

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Important caveat

• 1. Beware of the unit of analysis in poverty and
  inequality data! Poverty of heads-of-households
  or individuals is something completely different
  from poverty of whole households!
• 2. Generally speaking, income inequality amongst
  individuals has decreased (more people have
  earnings), whilst inequality amongst households
  has increased (the poor increasingly marry the
  poor and the rich increasingly marry the rich).

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What is happening to older workers

• Candidates
• - Incentives pension schemes, disability
  schemes.
• - Production long-term changes in the value of
  different activities.

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Incentives pension schemes

• Recall the pension profile of two schemes.
• Defined contribution
• 2) Pension rights defined from last-earned income.

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Incentives disability schemes

• Most OECD countries introduced wide-coverage
  disability schemes in the 50s and 60s. Most
  have expanded them in the last decades.
• Potential abuse a combination of employers and
  employees leaning on low-productive (unhealthy)
  workers to take disability benefits rather than
  be fired. This is especially problematic if the
  benefits are paid from general funds (free-rider
  issues).

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Background (production) trends

• Work in the OECD has become more specialised and
  its content is changing more rapidly
• - Skills deteriorate faster, which hits older
  workers especially hard.
• - Work is becoming more mentally demanding,
  leading to higher psychological demands.

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A stress epidemic?
Estimated Days lost due to stress per worker per
year. Source Frijters and Shields (2003)
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And who is on disability here?
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Interpretation

• 1. A lot of individuals on disability are having
  psychological problems. Relatively more so for
  younger disabled persons, consistent with the
  changing technology explanation.
• 2. Back pain (musculo-skeletal) seems to be
  important for older workers.
• 3. Neither back pain nor psychological problems
  are easy to verify medically.

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Conclusion?

• 1. We do not truly know the underlying cause of
  the disability explosion since the 60s. Could be
  either incentives or a fundamental change in what
  is demanded of workers.
• 1a. What we do know is that on disability
  benefits are generally the oldest, the least
  healthy, and the least earning of the potential
  workforce.
• 1b. Policy options are very similar to those of
  dealing with poverty traps.