How will the parties' policies affect the poverty rate?

A commonly used yardstick by welfare groups in Australia (such as ACOSS or the Brotherhood of St Lawrence) is relative poverty. This is typically defined as the share of people living in households whose post-tax incomes put them below half the median.

What’s important to note about this is that the poverty rate will go up if:

  • incomes at the bottom fall; or
  • incomes at the middle rise by more than incomes at the bottom

Bearing this in mind, I thought it might be worth taking a trot through the policies announced this election, to see what effect they will have on relative poverty.

Coalition policies

  • Tax cuts: increase poverty
  • Education tax rebates: increase poverty (since poor families are less likely to spend to the threshold, and more likely to have their kids drop out of school early)
  • Housing savings accounts for new homebuyers: increase poverty (the structure of these accounts is very strongly skewed to the affluent)
  • Expand dental care for those with chronically ill health: decrease poverty (if we count in-kind transfers)
  • 50 Family Emergency Medical Centres: probably decrease poverty (if we count in-kind transfers)

Labor policies

  • Tax cuts: increase poverty (though not by as much as the Coalition’s tax cuts)
  • Education tax rebates: ambiguous effect on poverty (targeted towards the bottom 2/3rds of households, but the above factors still apply)
  • Scrap AWAs: probably no effect on poverty (most are at the top of the distribution)
  • Restore unfair dismissal protection: probably no effect on poverty (the general economic consensus is that the link between employment rates and employment protection is pretty weak)
  • Create Fair Work Australia: ambiguous effect on poverty (see here for some work of my own on the relationship between minimum wages and relative poverty)
  • Create savings accounts for first homebuyers: ambiguous (takeup will be higher among richkids, but the young are poorer as a group)
  • Expand dental care 12-17 year olds: decrease poverty (if we count in-kind transfers)
  • Universal preschool for 4 year olds and higher childcare rebate: ambiguous (not clear whether the employment change will be greatest for low-wage or high-wage parents) probably reduce poverty (I’m reminded that the Melbourne Institute modelling Labor commissioned suggests that the policy will raise participation by 34,000 over 5 years, of whom 16,000 will be sole parents)

This is only a smattering of the policies on offer, focusing mainly on those that involve a transfer of money or aim to affect labour market outcomes. But I was struck by the fact that many of the policies (and most of the dollars) are going towards policies that will raise relative poverty.

It seems to me that there are a few reasonable answers to this:

  1. We shouldn’t care about relative poverty. At an inequality I attended in Seville recently, the feistiest debate was between the Europeans arguing for relative poverty lines, and the Americans arguing for absolute poverty lines. I’ve written a little about this on the blog recently.
  2. I’ve mistakenly classified some policies. Mine is very much a back-of-the-envelope calculation, so if you think I’ve mistakenly classified a policy, or skipped an important policy, let me know in comments.
  3. Relative poverty matters, and the parties have their priorities wrong. If this is the case, it’s surprising that the welfare groups who often talk about trends in relative poverty haven’t said much on the topic.
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15 Responses to How will the parties' policies affect the poverty rate?

  1. Scrap AWAs: probably no effect on poverty (most are at the top of the distribution)

    I’m not sure on what basis you say that, Andrew. You may be thinking of AWAs in mining, but there are a lot more of them in retail and hospitality and services – where a lot are at the bottom of the income distribution for wage-earners.

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  3. Andrew Leigh says:

    Mark, I’d be very surprised if more than a trivial share of AWA workers are in households in the bottom quartile of the income distribution (at that point, most are nonworking households). But even if that’s the case, then it’s not clear what impact scrapping AWAs has on earnings. My guess is that it would have a small negative impact on earnings (if asked to give you more sick leave days, the employer would want to pay you lower wages), but since wages are downwards sticky, the change would be modest at best.

  4. backroom girl says:

    “Expand dental care for those with chronically ill health: decrease poverty (if we count in-kind transfers)”

    Of course, one of the great problems of poverty analysis is that in-kind transfers very seldom enter the equation. For example, single parents on income support often think that the in-kind benefits associated with the pensioner concession card are so valuable that they are prepared to knock back promotions and other pay rises in order to stay on pension and continue to receive those benefits.

    The treatment of owner-occupied housing and public housing rent rebates are other cases in point. In the most recent poverty analysis released by Australia Fair (aka ACOSS), we find that age pensioners with no income other than the age pension fall below the poverty line if they own their own home (as most of them do) or live in public housing, but have incomes above the poverty line if they are paying private rent and receive rent assistance. So despite the fact that we know that owning your own home is one of the best protections against poverty in old age, the welfare lobby chooses to adopt a definition of poverty based on narrowly-defined cash income, which consigns most age pensioners to poverty (and, coincidentally if not conveniently, increases the overall poverty rate as well).

  5. Anthony says:

    “the welfare lobby chooses…”

    The welfare lobby? Where will that be?

    Ah, memories BG, it sounds like you’re channelling Paddy McGuinness circa 1987. You know, go behind the High Tariff Walls, through the Welfare Lobby and next thing you’ll find yourself in the Industrial Relations Club

  6. Brendan says:

    In my view, its absolute poverty that is important, not relative poverty. You could reduce relative poverty by making those at the middle poorer, but that doesn’t make those at the bottom any better off.

  7. Anthony says:

    Brendan, absolute poverty is important, but if we define poverty as an enforced exclusion from socially-defined ordinary living patterns and activities – ie, what is often called ‘relative poverty’ – then if the poor aren’t keeping up with the rise in community living standards, they are getting poorer or, at least, staying poor. In short, relative poverty lines demand we pay attention not just to the real incomes of the poor, but to how gains in living standards are being distributed.

  8. backroom girl says:

    Anthony – I’m interested that you reacted to your perceptions of my political views, rather than to the substance of the issue I raised. Are you seriously suggesting that the welfare lobby doesn’t exist, and doesn’t make choices (as we all do) about which statistics suit its purpose best?

    What I was trying to point out was that poverty statistics based on relative cash income alone, as most are, have some significant drawbacks as oobjective measures of the ‘truth’. So it is one thing to argue that relative poverty is conceptually important – it is an entirely more complex matter to measure it accurately. And I think it is unarguable that a measure of living standards (income in its fullest sense) that does not take account of the value of transfers in kind, rebates on goods and services and the value of owner-occupied housing is seriously flawed.

  9. Anthony says:

    BG, I wasn’t reacting to my perceptions, as you put it. From years of blog reading my perceptions of your political views place you a long way from PP McGuinness (and whether my perceptions are accurate is neither here nor there). I was reacting in a flippant way to seeing the words ‘welfare lobby’ thrown about: like I said, they took me back… So shoot me: it’s a Monday and heading for 37 degrees here in Melbourne suburbia.

    And so it’s got nothing to do with denying that ACOSS, a peak body, exists and makes choices (as we all do) about which statistics suit its purpose best etc etc.

  10. backroom girl says:

    That’s all right then, Anthony… So glad I don’t really have to channel PPMcG – that sounded like a very uncomfortable thing to have to do.

    Of course I am in a relatively privileged position, sitting in an airconditioned office when it’s heading towards 37 degrees, rather than in Melbourne suburbia. That presumably adds something extra to my real income 🙂

    Though, on the other hand, I do have to brave the public transport to get home this afternoon.

  11. Matt C says:

    According to the Workplace Authority, 68.5 per cent of West Australian employees in cafes and restaurants are employed under AWAs.* The industry with the greatest number of AWAs in WA is retail, with 40612 agreements registered. WA accounts for 28% of all AWAs registered. There are a significant number of people employed in traditionally award-reliant industries who are now employed under AWAs (and under other forms of post-reform agreement, such as employer greenfields agreements).

    Andrew, I don’t believe you’re right to suggest that the removal of AWAs would have a negligible effect on wages for some employees in low-paying industries. Your example about sick leave is misleading; sick leave is one of the five protected conditions under the Australian Fair Pay and Conditions Standard. You cannot trade higher pay for reduced sick leave under Work Choices. However, you can trade conditions such as penalty rates and allowances, which is what has occurred. The point is this: under AWAs, higher ‘headline’ rates of pay have been exchanged for reduced or eliminated income components such as overtime rates. If AWAs were to be removed, and therefore conditions such as penalty rates and allowances were to be restored, employees would see an increase in income. Your example about restored ‘income-neutral’ benefits (like sick leave) is not accurate.

    Still, overall I would probably agree with your statement… The likelihood of post-election IR changes affecting poverty rates in any substantial way would depend on:
    1) The likelihood that the ALP would ‘re-regulate’ to any great degree; and
    2) the number of employees below or near the poverty line who are employed under AWAs.

    I would be fairly dubious on point 1, and the truth is that AWAs have a low penetration rate outside of WA.

    *these figures are likely to significantly overstate the true level of AWA penetration in each industry. For instance, in highly casualised and high turnover industries such as retail and hospitality, an individual employee may have held several positions on a number of AWAs across the three year period.

  12. Matt C says:

    Sorry, that was a bit of a long, confused ramble.

    Still, here’s another factoid:

    New research into Vic’s retail and hospitality industries has found wages have fallen 1.3% and 0.7% respectively against the Vic all-industry average since the advent of Work Choices.

  13. Andrew Leigh says:

    Matt, thanks for the correction. I’m open to the possibility that WorkChoices has driven down wages, but earnings in those sectors are notoriously volatile. Also, the boom has brought a lot of low-skill workers into the labour force. IMHO, this is a great thing for those workers. But it’s also going to skew the average earnings downward.

  14. Fred Argy says:

    Andrew, I agree that both Coalition and Labor have little to offer poverty-fighting crusaders but it is the future trend in policy that could be decisive: where will future budget priorities and regulatory reforms take us? I think Rudd is likely to move in a distinctly different direction over time from say Costello.

    Personally I suspect that your assessment that “the link between employment rates and employment protection (EPL) is pretty weak” is too sweeping. My view is that in some extreme forms such as in parts of continental and southern Europe, EPL is damaging for employment. But at moderate levels (such as the levels that stood in Australia pre-WorkChoices), EPL has little impact on employment – especially if high EPL’s are associated with strong investments in human capital.

    In a recent paper for Club Troppo I said: “There is encouraging evidence from the experience of Scandinavian and smaller European countries that a strong worker safety net comprising relatively generous unemployment benefits, strong legal rights for trade unions, and some basic worker protection regulations is compatible with low unemployment so long as governments
    – allow employers considerable freedom to hire and fire;
    – impose stringent availability for work requirements as a condition for unemployment benefits; and
    – invest heavily in human capital.”

  15. Patrick says:

    I agree with Fred’s points. I would add that high EPL affects legitimate employment very strongly – Southern European countries have high levels of blackmarket employment partly to avoid ridiculous levels of employer tax and partly to avoid ridiculous levels of employee protection, which in industries such as hospitality are just not manageable for smaller operators.

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