Poverty, Inequality and Social Welfare in Australia

Poverty, Inequality and Social Welfare in Australia

Contributions to Economics Peter R. Haiss Cultural Influences on Strategic Planning 1990. ISBN 3-7908-0481-9 Manfred Kremer/Marion Weber (Eds.) Transforming Economic Systems: The Case of Poland 1992. ISBN 3-7908-0585-8 Marcel F. van Marion Liberal Trade and Japan 1993. ISBN 3-7908-0699-4 Hans Schneeweill/ Klaus F. Zimmermann (Eds.) Studies in Applied Econometrics 1993. ISBN 3-7908-0716-8 Gerhard Gehrig/ Wladyslaw Welfe (Eds.) Economies in Transition 1993. ISBN 3-7908-0721-4 Christoph M. Schneider Research and Development Management: From the Soviet Union to Russia 1994. ISBN 3-7908-0757-5 Bernhard Bohm/ Lionello F. Punzo (Eds.) Economic Performance 1994. ISBN 3-7908-0811-3 Michael Reiter The Dynamics of Business Cycles 1995. ISBN 3-7908-0823-7 Michael Carlberg Sustainability and Optimality of Public Debt 1995. ISBN 3-7908-0834-2 Lars Olof Persson/Ulf Wiberg Microregional Fragmentation 1995. ISBN 3-7908-0855-5 Andreas Foerster Institutional Analysis of Development Administration 1995. ISBN 3-7908-0853-9 Emesto Felli!Furio C. Rosati! Giovanni Tria (Eds.) The Service Sector: Productivity and Growth 1995. ISBN 3-7908-0875-X Giuseppe Munda Multicriteria Evaluation in Fuzzy Environment 1995. ISBN 3-7908-0892-X Boris Maurer R&D, Innovation and Industrial Structure 1996. ISBN 3-7908-0900-4 Giovanni Galizzi!Luciano Venturini (Eds.) Economics of Innovation: The Case of Food Industry 1996. ISBN 3-7908-0911-X

David Thomas Johnson Poverty, Inequality and Social Welfare in Australia With 3 Figures Springer-Verlag Berlin Heidelberg GmbH

Series Editors Werner A. Miiller Peter Schuster Author Dr. David Thomas Johnson Deputy Director Institute of Applied Economic and Social Research University of Melbourne Parkville, Victoria 3052 Australia ISBN 978-3-7908-0942-8 Die Deutsche Bibliothek - CIP-Einheitsaufnahme Johnson, David Th.: Poverty, inequality and social welfare in Australia/David Th. Johnson. (Contributions to economics) ISBN 978-3-7908-0942-8 ISBN 978-3-662-12729-2 (ebook) DOI 10.1007/978-3-662-12729-2 This work is subject to copyright. All rights are reserved, whether the whole or part of the material is concerned, specifically the rights of translation, reprinting, reuse of illustrations, recitation, broadcasting, reproduction on microfilm or in any other way, and storage in data banks. Duplication of this publication or parts thereof is pennitted only under the provisions of the German Copyright Law of September 9, 1965, in its current version, and permission for use must always be obtained from Springer-Verlag Berlin Heidelberg GmbH. Violations are liable for prosecution under the German Copyright Law. Springer-Verlag Berlin Heidelberg 1996 Urspriinglich erschienen bei Physica-Verlag Heidelberg 1996 The use of general descriptive names, registered names, trademarks, etc. in this publication does not imply, even in the absence of a specific statement, that such names are exempt from the relevant protective laws and regulations and therefore free for general use. SPIN 10537758 88/2202-5 4 3 2 1 0 - Printed on acid-free paper

PREFACE This book is about poverty, inequality and social welfare in Australia. It emphasises definitional issues, in particular the choice of the space of measurement and the choice of the tool of measurement. Previous poverty studies are surveyed and classified into those which are based on an individual or case approach emphasising deprivation and those which have attractive statistical properties using aggregate income statistics. A new index of poverty called the deprivation weighted index is defined based on everyday meanings, stressing the individual and relative nature of poverty and that it is felt with increasing severity the poorer one is. New estimates of poverty are made for Australia. Conclusions are derived from comparisons between measured levels over time and across family types. By restricting concern to these comparisons much of the inherent subjectivity of measurement is avoided. Poverty is found to have increased over the last decade and to be concentrated in particular family types, such as single parent families and nonworking families. Previous definitions of inequality and welfare are described and the relations between them and poverty are explored. The most common method of measuring welfare, based on per capita GDP, is analysed and its limitations described. Previous Australian studies of inequality and welfare are surveyed and new estimates are made for Australia for recent years. These show that while the size of the economy per head has grown this has been offset by an increase in inequality and the measure of social welfare has fallen slightly over the period. This book is primarily based on a PhD thesis and presents a cohesive development and use of a methodology for tackling a major social issue. In the process alternative and allied methodologies and their applications are surveyed. However like many text books, much of it may be approached without reading all preceding material. The following hints are suggested for those interested in taking a discerning approach. First, those interested in just the briefest summary, will learn what the book is about and what it has achieved by reading the first and last chapters. A second group of potential readers may be mainly concerned about recent and current levels of poverty, inequality and social welfare in Australia. For this group the chapters describing concepts and the development of the tools of measurement may be dispensed with. They should read Chapter 1, Chapters 5 and 6 describing respectively recent and current poverty in Australia, Sections 7.2, 9.1 and 9.2 describing recent and current inequality in Australia and Sections 8.3 and 9.3 which describe recent and current levels of social welfare in Australia. The three groups of empirical material, on poverty, inequality and social welfare may be read in any order. At the back of the book are Appendices related to issues raised in Chapters 3, 4 and 6. The Appendix to Chapter 6 contains detail about assumptions and data

vi Poverty, Inequality and Social Welfare in Australia manipulation employed in the new calculations presented in this book which may of interest to some readers. A third group of readers may wish to develop an understanding of the theory which underlies the calculations of poverty, inequality and social welfare._ These readers should read Chapter 2 which makes some important definitions, and Chapter 3 which outlines the conceptual basis for measures of poverty. The methodology for measuring poverty is developed in Chapter 4, for measuring inequality in Section 7.1 and for measuring social welfare in Sections 8.2 and 8.3. The Appendix to Chapter 4, located at the back of the book after the main text, contains some mathematical proofs which will be of interest to a limited number of readers. The body of the text reports mathematical formulae describing various concepts but contains little manipulation and the sense may be followed by those with little prior knowledge of mathematics. The final group of readers are those who are interested in all facets of poverty, inequality and social welfare. For these readers the book is best read in page order from start to finish. Many people have been of great assistance in enabling me to write this book. First, I would like to thank, Peter Dixon and John Creedy, for invaluable advice respectively on the development of the new index of poverty and for the structure of this book. Second, I would like to thank the Faculty of Economics and Commerce at Melbourne University in general and Richard Blandy in particular for supporting the six months study leave which was essential to writing up the first full draft. Third, I would like to thank Keith Hartley and Peter Lambert of the University of York for providing a home (in many senses of the word) for me and my family during my study leave. Finally I would like to acknowledge my profound appreciation of the unstinting support of my family. Tiana, William, Amy, Anna and Tony all provided the physical and emotional environment necessary for the successful pursuit of this enterprise, and put up with my irascibility, and intermittent husbanding and parenting. David Johnson February 1996

CONTENTS PREFACE v I CONCEPTS AND MEASUREMENT ISSUES 1. INTRODUCTION AND OUTLINE 3 1.1 Initial definitions 3 Poverty 3 Inequality 5 Social welfare 6 1.2 Outline of the book 8 2. UNITS OF ANALYSIS 9 2.1 The target group 9 2.2 The target space 10 Functionings and capabilities 10 Utility and money metric measures 11 Measures of income 12 Full income 13 Disposable income 13 Income adjusted for needs 14 Non cash income 16 2.3 The target period of analysis 17 Distinguishing time dependent effects 18 Effect of time on the unit of study 18 II POVERTY 3. APPROACHES TO THE MEASUREMENT OF POVERTY 23 3.1 Deprivation based approaches 23 Direct and indirect measures of well-being 24 Interpretation of direct measures 25 Other direct measures of poverty 26 3.2 Statistically based measurement of poverty 26 Poverty lines for different family types 27 Updating poverty lines 28 Relative and absolute poverty 29 3.3 Setting the poverty line 30 Budget based poverty lines 30 Consensual approaches to defining the poverty line 31 Australian poverty lines 32 3.4 Application of an integrated framework to poverty measurement 34

viii Poverty, Inequality and Social Welfare in Australia 4. DEVELOPMENT OF INDEXES OF POVERTY 37 4.1 The income gap measure and its variants 37 The axiomatic approach to poverty measurement 38 Further developments of the Sen index 39 4.2 Classes of poverty indexes 42 A general framework derived from a social evaluation function 42 4.3 A deprivation weighted poverty index 44 Definition 44 Relativity between income units and over time 47 A decomposition of Sen type poverty indexes 48 5. A SURVEY OF AUSTRALIAN STUDIES OF POVERTY 51 5.1 Australian measures using direct methods 51 5.2 Head-count based income measures 52 The Henderson studies 52 Changes in poverty during the seventies 56 Measures employing simulation techniques 60 6. NEW ESTIMATES OF POVERTY IN AUSTRALIA 63 6.1 Assumptions and definitions used in the calculations 63 Choice of space of measurement 63 Choice of poverty lines 64 Choice of indexes of poverty 65 Sources of data 66 6.2 Poverty in 1981-82, 1985-86 and 1989-90 67 Summary estimates Decomposition of summary estimates 6.3 Poverty in 1989-90 in groups Differences in poverty of groups Decomposition of differences between groups 6.4 Sensitivity of measurements to two key assumptions Effect of equivalence scales on poverty measurement Effect of updating index on poverty measurement 67 68 71 71 73 74 75 78 III INEQUAliTY AND SOCIAL WELFARE 7. INDEXES OF INEQUALITY 7.1 Inequality theory Quantile shares, Lorenz curves and Gini indexes Social welfare basis of income inequality measurement Further developments of inequality indexes Decomposable measures 7.2 Previous studies of income inequality in Australia Studies by Fodder and Kakwani 85 86 86 87 89 91 92 93

Contents ix Inequality measured with entropy based indexes 94 Recent estimates of inequality 94 Long run changes in the distribution of income 98 International comparisons 99 8. MEASURES OF WELFARE 101 8.1 The links between inequality, poverty and welfare 101 Poverty and affluence as components of inequality 101 Revealed welfare 104 ~ r e aaspects d e r of welfare 106 Inequality and dominance 108 Dominance and needs 109 A summary index of social welfare 110 8.2 National accounting measures of welfare 111 Real GDP and real GDP per capita 111 Alternatives to presently defmed GDP 113 The role of wealth in welfare 114 8.3 Previous Australian measures of welfare 114 Long-term growth in Australian GDP 114 Recent GDP performance 116 Comparison of welfare across countries 116 Exchange rate based comparisons 117 Purchasing power parity approaches 117 Cross country measures of welfare based on microdata 119 9. NEW ESTIMATES OF INEQUALITY AND SOCIAL WELFARE IN AUSTRALIA 9.1 Decomposition of inequality between groups in 1989-90 Choice of decompositional characteristics Results of the decomposition 9.2 Inequality over the years 1981-82, 1985-86 and 1989-90 Quintile shares of income Social welfare using dominance conditions Changes in characteristics associated with inequality 9.3 Social welfare in Australia, 1981-82, 1985-86 and 1989-90 121 121 121 122 126 126 128 129 132 IV CONCLUDING COMMENTS 10. SUMMARY, PROBLEMS AND FURTHER WORK 10.1 A review of the main findings Poverty defmition Poverty measurement Inequality and social welfare definition Inequality and social welfare measurement - 139 139 139 140 141 142

x Poverty, Inequality and Social Welfare in Australia 10.2 Comments on chapter fmdings 10.3 Further work 143 145 APPENDICES Appendices to Chapter 3 151 A3.1 Deriving a composite direct index of deprivation 151 A3.2 Hagenaars' derivation of a consensus based poverty line 152 Appendices to Chapter 4 154 A4.1 Derivation of Sen's index 154 A4.2 Proof of axiomatic properties of the deprivation weighted index of poverty 156 A4.3 An approximation used in poverty index decomposition 162 A4.4 Proof of an interpretation of the decomposition of Sen-type indexes 163 Appendices to Chapter 6 165 A6.1 Data sources and preparation 165 A6.2 Estimation of a new set of equivalence scales for Australia 168 A6.3 Confidence boundaries for survey results 169 BffiLIOGRAPHY 173 INDEX 181 FIGURES 4.1 Sensitivity of contributions to poverty to values of a 46 8.1 A trade-off between poverty and inequality 103 A3.1 Determination of the 'natural' poverty line 153 TABLES 5.1 Poverty in Melbourne; 1966 survey 52 5.2 Poverty among groups; 1972-73 54 5.3 Groups with disabilities 55 5.4 Poverty reported by Kakwani; 1975-76 57 5.5 Poverty reported by SWPS; 1973-74 and 1978-79 58 5.6 Poverty reported by Gallagher; 1972-73 to 1981-82 59 6.1 Summary estimates of poverty; Australia, 1981-82, 1985-86 and 1989-90 67 6.2 Decomposition of changes in poverty; Australia, 1981-82, 1985-86 and 1989-90, per cent 69 6.3 Poverty among income unit groups; Australia, 1989-90 71

Contents xi 6.4 Differences in poverty between groups and the average; 1989-90, per cent 74 6.5 Comparison of simplified Henderson and amended York equivalence scales 76 6.6 Comparison of poverty calculated using simplified Henderson and amended York equivalence scales; Australia, 1989-90 77 6.7 Comparison of poverty calculated using different updating indexes; Australia, 1972-73 to 1989-90 79 7.1 Gross income shares, Gini coefficient and mean income of income unit types by quintile; 1989-90 95 7.2 Shares of income unit types in quintiles of equivalent income for all income unit types; 1989-90, per cent of type 96 7.3 Characteristics by equivalent income quintile; 1989-90, per cent of all units 97 8.1 Average annual growth rates of real GDP and real private consumption per head in three periods; Australia 114 8.2 Estimates ofgdp and MEW; Australia, 1948-49 and 1972-73 115 8.3 Economic performance; Australia, 1963-64 to 1992-93 116 8.4 Ranking of OECD countries' GDP per head at average OECD prices using purchasing power parities; 1985 and 1990 118 9.1 Decomposition of inequality; Australia, 1989-90 123 9.2 Income inequality; Australia, 1981-82, 1985-86 and 1989-90 127 9.3 Decile points on the Lorenz and generalised Lorenz curves of equivalent income; Australia, 1981-82, 1985-86 and 1989-90 129 9.4 Contribution of various decompositional characteristics to inequality; Australia, 1981-82, 1985-86 and 1989-90 130 9.5 Estimates of growth in social welfare; Australia, 1981-82, 1985-86 and 1989-90 133 A6.1 Equivalence scales, poverty lines for 1989-90 calculated on a relative basis for all income units 167 A6.2 Comparison of simplified Henderson and amended York equivalence scales 169 A6.3 Standard errors for estimates of persons, 1981-82, 1985-86 and 1989-90 170