The Drivers of Life‐Cycle Wage Inequality in Australia

Abstract

Why does wage inequality rise with age? Using panel data on male wages, we explore the relative importance of unobserved worker heterogeneity versus random wage shocks in explaining this life‐cycle trend in Australia. While we find significant heterogeneity in wage levels (via differences in starting wages), we find no evidence of systematic heterogeneity in wage growth. Instead, highly persistent wage shocks are found to account entirely for the rise in wage inequality with age. We also find evidence that the upward trend in wage inequality since the early 2000s reflects an increase in permanent rather than transitory wage inequality.

The ‘right’ level for the superannuation guarantee: identifying the key considerations

“…Whether time discounting should be applied given the purpose of the SG is an open question. Evidence exists that many people demonstrate time preference (see Goda et al ., 2015), and some may even heavily discount the future in a time‐inconsistent manner. However, Chetty (2015) argues that policy might be set to counter these propensities to ensure sufficient savings to support adequate retirement income.…”

“…These income levels represent average pre-retirement income from age 25 to age 66 before deducting personal income tax and any SG. We then convert these averages to a hump-shaped income profile by applying the model of Freestone (2018), as outlined in Appendix A1.4. Summary statistics for the income distributions appear in Table 2.…”

“…Income is expressed in real Australian dollars, with a base of June 2019. Income in the pre-retirement phase is hump-shaped, and calibrated to average pre-retirement income using the model of Freestone (2018).…”

“…We partly address income risk through an early retirement scenario, although this issue is more complex than captured by this analysis. Another issue is that the analysis is conducted in real terms under the assumption that all amounts inflate at a common real rate, with the exception of allowing for real income growth at the individual level under the model of Freestone (2018). 6 In particular, we do not allow for economy-wide real income growth, which would: (a) boost the dollar value of contributions thus increasing the balance available at retirement; (b) raise the post-retirement consumption target under the replacement rate objective; (c) have unknown effects on the ASFA standards, which are based on the cost of a basket of goods; and (d) would act to increase the level of Age Pension available given its link to average weekly earnings.…”

“…We form income profiles using the model developed by Freestone (2018). Freestone (2018) analyses the distribution of wage income in Australia using panel data from the Household, Income and Labour Dynamics in Australia (HILDA) survey, and finds significant heterogeneity in wage levels but no evidence of systematic heterogeneity in wage growth rates. We apply the predicted values from this model to generate income profiles in the preretirement phase, which follow the same hump-shape for each income level.…”