Market volatility, ageing and policies: what is shaping the income distribution in Australia between 2002 and 2016
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Income inequality, as well as the role of the tax-benefit system in mitigating inequality, has attracted considerable attention during the past decade. While inequality in Australia has not changed dramatically, several factors have contributed to fluctuations in it. The paper examines the effect of four main factors (policy, market income, demography and other) on changes in income inequality in Australia between 2002 and 2016 using the HILDA surveys and adopting an extended decomposition framework. The decomposition separates the contribution of each factor by comparing the current income distribution with that calculated in the counterfactual where marginal changes in each of the factors are introduced. For each counterfactual, the paper uses the tax-transfer STINMOD+ model to simulate household disposable income based on the corresponding tax and social transfer rules in Australia. Our results suggest that the main driver of higher inequality is market income, while ageing is a consistent factor reducing inequality.
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