Abstract: We study the nature of earnings dynamics by documenting higher-order moments of residual income changes, using the Household, Income and Labour Dynamics in Australia (HILDA) Survey 2001-2020. Similar to other countries (e.g. see Guvenen et al. 2021 and De Nardi et al. 2021), we find that the distribution of earnings shocks in Australia displays negative skewness and excess kurtosis, deviating from the conventional linearity and normality assumptions, and that family and government insurance against risks is substantial. However, the sources of fluctuations and the role of family and government insurance are different. First, unlike in the Netherlands and the US, wage changes are strongly associated with earnings changes and account more for the dispersion of earnings shocks (second-order risk); meanwhile, the contribution of hour changes is largely absent in upward movement and relatively small in downward movement of earnings changes. Second, family insurance via income pooling and adjustment of labour market activities of secondary earners, and government insurance embedded in the targeted transfer system play more distinct roles in reducing risks. Government insurance is more important in mitigating the dispersion of earnings shocks, whereas family insurance is dominant in mitigating the magnitude and likelihood of extreme and rare shocks. Furthermore, our comparison of risks between demographics reveals: (i) a risk equalizing effect of government insurance, and (ii) persistent risks for certain groups such as female heads of household and non-parents.
Paper presentations to date: A-Life Conference 2021 (Crawford School of Public Policy, ANU); RSE Macro Seminar series (Virtual, ANU); 3rd Annual PhD Workshop 2021 (Virtual; ANU); Workshop of the Australasian Macroeconomics Society or WAMS 2021 (Virtual); Treasury 2022; Tax and Transfer Policy Institute (TTPI) 2022 (Crawford School of Public Policy, ANU); Australian Labour Market Research (ALMR) Workshop 2022 (ANU).
Authors: Darapheak Tin and Chung Tran
We build a general equilibrium OLG model with married couples having children to study the welfare effects of child-related transfers (i.e., the Child Care Subsidy and the Family Tax Benefit part A and part B programs) in Australia. In this paper, we also incorporate lessons learnt from our previous work on Lifecycle Earnings Risk and Insurance: New Evidence from Australia to better capture the dynamics of earnings (e.g., the persistence of risks) over lifecycle in Australia.
Paper presentations to date: RSE Macro Study Group (ANU); 21st Annual SAET Conference (ANU); RSE Annual PhD Workshop 2022 (ANU).
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