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Lifecycle Earnings Risk and Insurance: New Evidence from Australia

Authors: Darapheak Tin and Chung Tran

Abstract: This paper studies the nature of earnings dynamics in Australia, using the Household, Income and Labour Dynamics in Australia (HILDA) Survey 2001–2020. Our results indicate that the distribution of earnings shocks displays negative skewness and excess kurtosis, deviating from the conventional linearity and normality assumptions. Wage changes are strongly associated with earnings changes and account more for the dispersion of earnings shocks; meanwhile, the contribution of hour changes is largely absent in upward movement and relatively small in downward movement of earnings changes. Furthermore, family and government insurance plays distinct roles in reducing exposure to earnings risk. Government insurance embedded in the targeted transfer system is important in mitigating the dispersion of shocks, whereas family insurance via income pooling and adjustment of secondary earners’ labour market activities is dominant in reducing the magnitude and likelihood of extreme and rare shocks. The magnitude and persistence of earnings risk as well as the insurance role of family and government vary significantly across gender, marital and parental status. Accounting for these non-Gaussian and non-linearity features is important for evaluating the insurance role of government transfer programmes.

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).

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Full article (Economic Record, 2023)  
Tecnical Appendix
Slides (11/2022)

Working Paper

Aggregate Implications of Child-Related Transfers with Means Testing

Authors: Darapheak Tin and Chung Tran

Abstract: Abstract Should government transfers to families with children be means-tested or universal? We revisit this question and provide new insights from the Australian policy settings where joint family income tests determine eligibility and benefit levels of child-related transfers. We first document key empirical facts on child-related transfers and distinct age-profiles of labor supply of mothers in Australia, using household survey data HILDA 2001-2020. Next, we build a dynamic general equilibrium overlapping generations model of single and married households with children and quantify the implications of child-related transfers with means testing for female labor supply, macro aggregates, and welfare. Our results indicate that strict and complex benchmark means testing rules can result in significant adverse effects on female labor supply and human capital accumulation. A reform that switches from the benchmark means-tested child-related transfer system to a universal system can improve aggregate efficiency and welfare. This reform is supported by the majority; however, the resultant high tax burden leads to welfare losses of single mothers who are the intended beneficiaries. We also show that adjusting the size of the universal transfers does not address this inequity issue. On the other hand, a simple incremental reform of relaxing the work subsidy’s taper rates improves efficiency, welfare and equity outcomes altogether, but the welfare gains are smaller relative to the universal program. Lastly, our findings highlight the limited self-insurance capacity (via work and borrowing) of low-income parents during their younger years and therefore the need for government insurance in the form of employment-independent child-related support.

Paper presentations to date: RSE Macro Study Group (ANU); 21st Annual SAET Conference (ANU); RSE Annual PhD Workshop 2022 (ANU); 17th Western Economics Association International (WEAI) 2023 Conference (University of Melbourne); 37th PhD Conference in Economics and Business 2023 (University of Melbourne).

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 Working paper (28/11/2023)  
 Slides (20/11/2023)

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