Executive summary
This paper focuses on financial disadvantage among Australians using data from the first two waves (2001 and 2002) of the Household, Income and Labour Dynamics in Australia (HILDA) survey.
HILDA has several features that make it particularly useful for investigating poverty and financial disadvantage. It is the first large-scale Australian longitudinal survey of adults specifically designed to investigate income dynamics; previous studies of poverty have relied on cross-sectional data. Second, it includes measures of financial disadvantage, subjective poverty and financial stress not found in previous studies. Third, income data was collected from all available (and eligible) household members, which improved the accuracy of income and other variables. Fourth, HILDA Wave 2 data includes wealth, assets and debts, which allows for the examination of their relationships with financial disadvantage. Finally, HILDA includes a range of data on other factors that are not usually collected in Australian surveys on income.
In this paper, three dimensions of financial disadvantage are investigated:
- income poverty (both before and after-housing)
- subjective poverty
- financial stress.
For this paper, being in income poverty is defined as living in a household with an income of less than 50 per cent of median equivalised disposable household income. The equivalence scale used was the modified Organisation for Economic Co-operation and Development (OECD) scale. Both before and after-housing measures were analysed. Subjective poverty is based simply on whether respondents view themselves as poor or very poor. The concept of financial stress is defined by cash flow problems resulting from a shortage of money. The following is a list of cash flow problems.
- Could not pay utility bills on time.
- Could not pay mortgage or rent on time.
- Pawned or sold something.
- Went without meals.
- Was unable to heat home.
- Asked for financial help from friends or family.
- Asked for help from welfare or community organisations.
Households are considered to be in financial stress if they experienced two or more incidences of cash flow problems in a single year.
The rationale for using three dimensions of financial disadvantage is that an over-reliance on a single measure can be misleading. The concept of financial stress complements income poverty by indicating how households are actually coping financially. Subjective poverty is another approach to financial disadvantage, taking seriously people's own judgements of their financial situation.
This paper investigates the extent of financial disadvantage in Australia according to these three dimensions, the relationships of these dimensions with other factors, and the interrelationships between these measures and their performance over time.
Some of the major conclusions drawn from this paper are summarised below.
- Before-housing measures of poverty need to be complemented with the appropriate after-housing measures. Before-housing measures tend to inflate the poverty rates of older cohorts, single-person households and widows and widowers. These groups do not have notably high poverty rates on the after-housing measure since a substantial proportion have little or no housing costs. Older cohorts and widowers tend to have low levels of subjective poverty and financial stress.
- The high level of financial stress among younger cohorts may be a concern. It may reflect low levels of financial literacy or spendthrift attitudes. It is not clear whether this is an ageing effect—young people become more competent at managing finances and experience lower levels of financial stress as they age—or, of greater concern, a cohort effect, reflecting a change in the way in young generations spend and save money.
- Marriage greatly reduces the odds of financial disadvantage.
- Financial disadvantage is only weakly related to socioeconomic background.
- Wealth has a stronger relationship with subjective poverty than with income poverty.
- The judgement that one is poor is affected more by wealth than by income.
- Debt is only weakly related to income poverty, subjective poverty and financial stress. For the groups in income poverty, subjective poverty and financial stress, debt is much lower than assets.
- It appears that in Australia, as in other countries, the proportion in income poverty in successive years is much lower than the proportion in a single year. This is also true of subjective poverty and financial stress. This indicates that on any measure, financial disadvantage is more often transitory rather than permanent.
- The low correspondence between the three dimensions of financial disadvantage undermines attempts at using these measures to identify the 'truly disadvantaged'. Not only are the correlations lower than expected, but they also differ in their relationships with other factors such as sex, age, education, income, wealth and debt. This suggests that the three dimensions are to a large extent conceptually distinct. Income poverty is about relatively low annual incomes, subjective poverty is a psychological judgement that gives more weight to wealth than to income, and financial stress is about an imbalance between expenditure with income.