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Report on the Low Consumption Possibilities research project

The Analytical Services Branch (ASB) and the Living Conditions Section have just completed the analytical phase of the "Low Consumption Possibilities" project. The main objective of the project is to develop a conceptual framework of low consumption possibilities based on income and wealth. The framework will inform the development of measures that will be used to more accurately identify Australian households that have low consumption possibilities and are at risk of experiencing economic hardship. “Consumption possibilities” refers to people’s command over resources that can be used to obtain goods and services to satisfy their needs and wants.

The use of low consumption possibilities to identify economic hardship is a conceptual shift away from previous efforts which used income alone as the basis for identifying economic hardship. This shift has been influenced, in part, by the fact that income is not a good predictor of living standard outcomes if it is measured by what people consume. ABS Income and Expenditure Survey data have shown that some households in the lowest income deciles quite often have expenditure that is higher than their reported income, while others have higher expenditures than households in the second or third income deciles. This probably suggests that some of the households in the bottom income deciles may not be experiencing economic hardship or that they may be financing their consumption from assets, debt or from some sort of transfers. This situation underlines the role of wealth as an important component of consumption and well-being, and the need to go beyond income alone as a determinant of economic well-being and economic hardship.

There are also practical and conceptual reasons for this shift. First, the term “consumption possibilities” more reliably reflects the economic resources available to a household than measures of income (or wealth) alone. Second, the concept of consumption possibilities considers the household’s capacity to consume, rather than just its actual or current consumption.

Although the role of wealth in consumption and well-being has long been noted, the absence of comprehensive data on wealth has precluded the use of wealth as a component in the measurement of economic hardship and well-being. This situation changed since data from the integrated 2003–04 Survey of Income and Housing (SIH) and Household Expenditure Survey (HES) became available. The HES collected data on the expenditure, income, net worth and other characteristics of persons resident in private dwellings throughout Australia. It included an expanded range of questions on income, and for the first time, it also included a comprehensive range of questions on household assets and liabilities.

Two methods were developed for the measurement of consumption possibilities. Both involved a consideration of the joint distribution of income and wealth. The first method, called the annuitisation method, involves the integration of the separate distributions of income and wealth into one distribution. The second method, called the ‘Low Economic Resources’ (LER) method, involves the identification of households that are located simultaneously in the bottom four deciles of both the income and wealth distributions. The annuitisation method yielded estimates of equivalised wealth-adjusted income (EWAI) for persons living in households. Persons living in households in the bottom two deciles of EWAI were deemed to have low economic resources. Modelling and analyses of the characteristics of persons at various points in the income and wealth distributions were used in selecting the cut-off points for both LER and the EWAI distributions.

The results of the analysis showed a very close overlap between the two methods in the types of persons identified as experiencing economic hardship. About 85 per cent of persons identified by the annuitisation method as having low wealth-adjusted income are also identified by the LER method as having low economic resources and at risk of economic hardship. On the whole, about 17 per cent of the population are identified as having both low EWAI and LER. On the other hand, nearly five per cent of the population are identified as having low EWAI but not LER, while 3.4 per cent are identified as having LER but not low EWAI. About 75 per cent of the population has neither low EWAI nor LER.

Validation of the methods showed that the characteristics of persons identified by both methods as having low consumption possibilities are consistent with characteristics normally associated with economic hardship. These persons are more likely than other persons to depend on government pensions and allowances as their principal source of current household income, to live in public housing, to not be in the labour force and to report high levels of financial stress and financial management problems. Demographically, higher than average proportions of persons identified by the two methods as having low consumption possibilities live in one-parent households with dependent and non-dependent children as well as in lone-person and couple-only households where the reference person is aged 65 years and over. They are also likely to have lower levels of educational attainment than persons identified as not having low consumption possibilities.