Household Economic Inequality in Australia

We use data from the Household Expenditure Survey and Household, Income and Labour Dynamics in Australia Survey to document facts about consumption and income inequality among households in Australia, emphasising the role of the rents imputed to home owners for conclusions about inequality. Consistent with other developed economies, consumption inequality in Australia is lower on average than income inequality. Both have increased since the early 1990s, with income inequality increasing by more. We decompose the trend in income inequality into four components: (i) changes in observed household characteristics; (ii) changes in the returns to unobserved skills; (iii) changes in the size of persistent income shocks; and (iv) changes in the size of transitory income shocks. We find that changes in the size of persistent and transitory income shocks, rather than changes in observed household characteristics, explain most of this trend. Since the middle of the 2000s, the source of income inequality has shifted from transitory to persistent factors, which is consistent with the rise in consumption inequality over the corresponding period. We find that accounting for imputed rents lowers estimates of the level of inequality in Australia, but has a negligible effect on the trends.