Income Distribution

Since the Australian Bureau of Statistics began to release unit record data from its Income and Housing Survey and Household Expenditure Survey in the mid-1980's, microsimulation has become increasingly important as a tool for analysing distributional issues in Australia. Microsimulation is distinguished from other analytical approaches in that it relies on simulating the behaviour of individual units within the society, such as persons, families or households. However changes in the incomes of individuals generally depend not only on changes that apply to them directly (such as a change in the eligibility rules for a government benefit) but also on changes that are mediated by the operation of commodity or factor markets (such as a change in the terms of trade or a change in defence spending). Hence models which depend entirely on the characteristics of individuals as a basis for simulation, and this includes most microsimulation models, tend to be restricted both in the range of issues they can address and in the range of adjustment mechanisms they can bring to bear on an issue.

In the light of these limitations, the Centre of Policy Studies has established a program of research designed to link microsimulation models with its well established applied general equilibrium models. In this endeavour, particular attention is being paid to the role of employment. Employment is important for distribution for two reasons. Firstly, most people receive most of their income in the form of wages, with about two thirds of gross income in Australia being accounted for by this source. Second, different individuals derive their wage income from different occupations, and the change in demand for labour of a particular type in response to some change in the economic environment may be quite different from the change in the aggregate demand for labour. For many years now the Australian economy has been characterised by a substantial amount of involuntary unemployment, and economic forecasters (including government forecasters) do not expect this situation to change for some years to come. Under these circumstances, it is the demand side of the labour market that is the primary determinant of employment and, given the importance of wages as an income source, the effect of economic change on the demand for labour of different types is likely to be a prime determinant of its effect on the distribution on income.

In recent applications, linked applied general equilibrium / microsimulation models have been used at the Centre of Policy Studies to analyse the distributional implications of microeconomic reform, fiscal policy and monetary policy. The Centre is also engaged (with financial assistance from the Australian Research Council) in a joint project with the National Centre for Economic and Social Modelling (NATSEM) to link COPS applied general equilibrium models with NATSEM microsimulation models.

The income distribution research is mainly carried out by Tony Meagher.