Lifecycle earnings risk and insurance: New evidence from Australia

Authors: Chung Tran and Darapheak Tin

This paper studies the nature of earnings dynamics in Australia, using the Household, Income and Labour Dynamics in Australia (HILDA) Survey 2001-2020. Our findings indicate that the distribution of earnings shocks displays negative skewness and excess kurtosis, deviating from the conventional linearity and normality assumptions. There is variation in the sources of earning shocks. Wage changes are strongly associated with earnings changes and account more for the dispersion of earnings shocks; meanwhile, the contribution of hour changes is largely absent in upward movement and relatively small in downward movement of earnings changes. Furthermore, family and government insurance play distinct roles in reducing exposure to earnings risk. Government insurance embedded in the targeted transfer system is more important in mitigating the dispersion of earnings shocks, whereas family insurance via income pooling and adjustment of secondary earners’ labour market activities is dominant in reducing the magnitude and likelihood of extreme and rare shocks. Finally, the magnitude and persistence of earnings risk as well as the insurance role of family and government vary significantly across primary earner’s gender, marital and parental status.

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