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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: 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 family earnings and demographic characteristics determine eligibility and benefit of the child-related transfers. We first document key empirical facts on the child care programs and the distinct age-profiles of mothers’ labor supply in Australia. Next, we build a dynamic general equilibrium overlapping generations model of single and married households with children to quantify the implications of the status quo means-tested system and potential reforms for female labor supply, macro aggregates, and welfare. Our results indicate that strict and complex benchmark means-test rules can result in significant adverse effects on female labor supply and human capital accumulation. A universal child-related transfer system improves the aggregate efficiency and welfare and is supported by the majority; however, the resultant high tax burden leads to a welfare loss for single mothers who are the intended beneficiaries. A simple incremental increase of the child care subsidy rate can boost both efficiency and welfare, while also achieving a more equitable distribution of welfare gain. However, this approach yields a lesser overall welfare improvement compared to the universal scheme and lacks majority 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 (25/04/2024)  
 Slides (20/11/2023)

On the Optimal Design of Means-Tested Child-Related Transfers

Authors: Darapheak Tin

Abstract: Means-tested child-related transfers offer a cost-effective method of providing benefits to low-income families, achieving fiscal savings not possible with universal schemes. To further this objective, additional instruments such as multi-tier family-income tests and demographic targeting are employed. However, the complexity of these criteria introduces several challenges, including prohibitively high effective marginal tax rates (EMTR) for low-income mothers, non-monotonic EMTR schedules, and variations in EMTR schedules across different demographic groups. Such factors could discourage work, impact lifetime labor supply, and contribute to disparities in lifetime earnings between targeted and non-targeted groups. This raises the question: Should governments opt for simpler means-testing rules, and if so, how should these be designed? Grounded in the Australian policy setting, we develop a dynamic general equilibrium model that incorporates households with varying marital statuses and children, endogenous female labor supply and human capital, and idiosyncratic earnings shocks. Utilizing this model, we characterize the optimal means-tested child-related transfer system and quantify its impact on macroeconomic aggregates, welfare, and redistribution.

Paper presentations to date: RSE Macro Seminar 2024 (ANU).

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