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Distributional Effects of Changes in Australian Infrastructure Industries during the 1990s

Staff working paper

This paper by George Verikios and Xiao-guang Zhang was released on 25 January 2008.

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  • Key points
  • Information release
  • Contents

During the 1990s, reforms and other developments improved productivity and reduced prices in Australian infrastructure services. These changes raised the average incomes of Australian households.

Household incomes increased in every jurisdiction and in every decile of the income distribution.

Changes in the electricity and telecommunications industries dominated distributional outcomes. The main sources of changes were productivity improvements and lower real prices.

There was a mix of direct price effects, indirect price effects and income effects:

  • Direct price effects: real prices paid by households for most infrastructure services declined. Low income households gained proportionately more from such declines than high income households.
  • Indirect price effects: decreasing infrastructure prices lowered costs for industry and, consequently, output prices fell. This reduced households' expenditure and the cost of Australia's exports. Output increased in some industries. This increased the demand for other inputs which, in turn, led to wage increases in some occupations and increased returns to capital. This led to costs and prices rising, and output falling, in some industries.
  • Income effects: wages increased most for occupations that are more heavily represented in high income households. High income households also receive a large proportion of returns to capital, which also increased. Low income households that do not rely on wage incomes were not affected directly by the changes in wages.

Government transfers were indexed to the consumer price index and average weekly earnings. Low income households rely more on these transfers than other households. Indexing the transfers contributed to maintaining real incomes in low income deciles.

Overall, the effect on household income distribution was small, slightly favouring more affluent households, because increases in factor incomes (wages and returns to capital) dominated.

During the 1990s, reforms and other developments improved productivity and reduced prices in Australian infrastructure services. These changes raised the average incomes of Australian households.

Household incomes increased in every jurisdiction and in every decile of the income distribution.

Changes in the electricity and telecommunications industries dominated distributional outcomes. The main sources of changes were productivity improvements and lower real prices.

There was a mix of direct price effects, indirect price effects and income effects:

  • Direct price effects: real prices paid by households for most infrastructure services declined. Low income households gained proportionately more from such declines than high income households.
  • Indirect price effects: decreasing infrastructure prices lowered costs for industry and, consequently, output prices fell. This reduced households' expenditure and the cost of Australia's exports. Output increased in some industries. This increased the demand for other inputs which, in turn, led to wage increases in some occupations and increased returns to capital. This led to costs and prices rising, and output falling, in some industries.
  • Income effects: wages increased most for occupations that are more heavily represented in high income households. High income households also receive a large proportion of returns to capital, which also increased. Low income households that do not rely on wage incomes were not affected directly by the changes in wages.

Government transfers were indexed to the consumer price index and average weekly earnings. Low income households rely more on these transfers than other households. Indexing the transfers contributed to maintaining real incomes in low income deciles.

Overall, the effect on household income distribution was small, slightly favouring more affluent households, because increases in factor incomes (wages and returns to capital) dominated.

Preliminaries
Preface, Acknowledgments, Abbreviations, Key points and Overview.

1 Introduction
1.1 Infrastructure industries, microeconomic reform and other influences
1.2 Purpose
1.3 Previous studies
1.4 Approach
1.5 Outline

2 Models and data
2.1 Analytical framework
2.2 The MMRF model and database
2.3 The ID model and database
2.4 Interpreting the results

3 Electricity
3.1 Changes in the electricity industry during the 1990s
3.2 Modelling the changes in the electricity industry
3.3 Economywide effects
3.4 Household effects

4 Gas
4.1 Changes in the gas industry during the 1990s
4.2 Modelling changes in the gas industry
4.3 Economywide effects
4.4 Household effects

5 Ports and rail freight
5.1 Changes in the ports and rail freight industries during the 1990s
5.2 Modelling changes in the port and rail freight industries
5.3 Economywide effects
5.4 Household effects

6 Telecommunications
6.1 Changes in the telecommunications industry during the 1990s
6.2 Modelling the changes in the telecommunications industry
6.3 Economywide effects
6.4 Household effects

7 Urban transport
7.1 Changes in urban transport during the 1990s
7.2 Modelling changes in the urban transport industry
7.3 Economywide effects
7.4 Household effects

8 Water and sewerage
8.1 Changes in the water and sewerage industry during the 1990s
8.2 Modelling the changes in the water and sewerage industry
8.3 Economywide effects
8.4 Household effects

9 Summary and conclusions
9.1 Real income effects
9.2 Gini coefficients
9.3 Further research

A MMRF industries/commodities

B An index of purchasing power

References