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This report was published by the former Department of Families, Community Services and Indigenous Affairs (FaCSIA).
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1. Introduction


This paper focuses on three dimensions of financial disadvantage in Australia: income poverty, subjective poverty and financial stress. It examines the relationships between these three aspects of financial disadvantage and a range of social and economic correlates, including wealth, assets and debt. Since these dimensions are often understood as different indicators of financial disadvantage, the paper also examines the interrelationships between these indicators and their dynamics.

Being in income poverty is defined as living in a household whose income, after adjusting for household composition, is below a designated poverty line. Subjective poverty is seeing oneself as poor or very poor. Individuals and households in financial stress are not coping financially; they have difficulty in meeting their financial obligations and may seek financial assistance from others.

Income poverty, subjective poverty and financial stress are by no means the only concepts of financial disadvantage. Other concepts include expenditure poverty which, similar to income poverty, is operationalised as an expenditure level that is lower than a designated level (FaCS 2003, p. 92; Saunders 1997, 1998b); relative deprivation, defined as an 'enforced lack of perceived social necessities in life' (Mack & Lansley 1985, p. 39); multi-dimensional approaches (Dewilde 2004; Kangas & Ritakallio 2004a), which are operationalised by combining several measures of poverty; and the social exclusion approach (Eurostat Task Force 1998; Saunders & Kayoko 2002, pp. 45-62; Tsakloglou & Papadopoulos 2002; Whelan et al. 2003), which broadens the concept of poverty to include social relationships and participation. However, because these other concepts of financial disadvantage are not well measured in the data upon which this paper is based—the first two waves of the HILDA survey—this paper is limited to income poverty, subjective poverty and financial stress.

Concepts such as subjective poverty, expenditure poverty, deprivation and financial stress were often developed to complement measures of income poverty. The concept of income poverty can be criticised because a low income does not necessarily mean that such households are not spending enough money on the basic necessities of life, are deprived of the basic household goods (such as cars and washing machines) widely understood as necessary for modern living, are judging themselves as poor, are excluded from 'normal' lifestyles, or are not coping financially. The implicit assumption in much of this work is that several indicators of financial disadvantage are better than a single indicator in identifying the truly disadvantaged in society.

One purpose of this paper is to examine whether subjective poverty and financial stress measures complement income poverty measures. Specifically, are they all indicators of the same underlying concept of financial disadvantage, and are the social profiles and risk factors for the three dimensions much the same?

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1.1 Income poverty

Much more research has been conducted on income poverty than on other indicators of financial disadvantage. This is especially the case for Australia. The Henderson poverty line (HPL), developed by Ronald Henderson in the mid-1960s, formed the basis for most of the Australian poverty research from the early 1970s to the late 1990s. The original HPL was defined in absolute terms as the basic wage plus child endowment for a family of four in the mid-1960s (Henderson, Harcourt & Harper 1970; Saunders 1998a). The justification for this poverty line was that few would disagree that an income below this amount was not sufficient to support a family.

Over the last decade or so, relative measures of poverty have replaced the HPL. Relative measures draw a poverty line at a percentage (usually 50 per cent) of the median or mean household income. There are several reasons for the move from the HPL to relative measures. Relative measures of poverty are more commonly used by the OECD and by researchers in other industrialised nations (Förster 1994, 2001; Jarvis & Jenkins 1997; Organisation for Economic Co-operation and Development 2001; Oxley, Dang & Antolin 2000). In addition, the HPL is now so old that many of its assumptions—the basic wage, a male breadwinner, a typical family of four, patterns of expenditure in the 1950s and 1960s—are much less tenable today. Furthermore, in relative terms the HPL is now much higher than it was 20 years ago because of the way it has been updated.1

Although most research on poverty in Australia uses relative measures, there is little consensus on what those measures should be. The major issues are whether to use mean or median household income, where the poverty line should be drawn, how the equivalence scale should be used to make households with different compositions comparable and what constitutes disposable income. These issues are discussed in the following paragraphs. Appendix 2 presents a more detailed discussion of these and other issues. There is, however, broad consensus on three general issues regarding relative measures of income poverty: that disposable income—that is, income after adjusting for taxation and government benefits—is preferable to gross income, that disposable income should be adjusted for household size, and that household income rather than individual income should be used to assess whether a person is in income poverty.

The 2001 report from the University of Canberra's National Centre for Social and Economic Modelling (NATSEM) on financial disadvantage in Australia presented estimates for many measures of poverty, but the headline measure was based on mean disposable income (Harding, Lloyd & Greenwell 2001). Mean income appears to be the basis for the study of poverty in the United Kingdom (Jarvis & Jenkins 1998, 2000). However, poverty lines drawn at a percentage of the mean income can be criticised since they are more sensitive than median-based measures to changes in the distribution of income (Saunders & Kayoko 2002, pp. 1-22). A flattening of the income distribution will almost invariably increase the proportion in poverty on mean-based measures.

A second issue is where to draw the poverty line. Most often the poverty line is drawn at 50 per cent of the mean or median disposable household income, but there is no reason why it could not be drawn at another level. A 60 per cent cut-off is increasingly used in studies of poverty in the European Community (Eurostat Task Force 1998). Drawing poverty lines at 40, 50 and 60 per cent produces quite different estimates of the level of poverty and its persistence (Headey, Marks & Wooden 2005; Layte & Whelan 2003).

Equivalence scales are used to adjust for the number of adults and children in the household. The modified OECD equivalence scale is becoming standard. It assigns a weight of 1.0 to the first adult, 0.5 to the second adult and 0.3 to each child. An alternative equivalence scale simply weights by the square root of household size. In Australia, the equivalences for the HPL are often used. There are many equivalence scales that could be used to make households comparable, but different equivalence scales often produce different profiles of the types of households experiencing poverty (Coulter, Cowell & Jenkins 1992).

Finally, there is the general issue of what constitutes disposable income. Post-taxation and post-government transfer incomes do not take into consideration essential costs. After essential costs are deducted, discretionary income is probably a better indicator of a household's financial situation. Estimating essential costs is a difficult exercise, since there are a myriad of goods and services (ranging from motor cars to haircuts) that could be deemed essential. Housing is one cost that is commonly deducted to compute discretionary income (for example, Harding, Lloyd & Greenwell 2001).

In the examination of financial disadvantage, it may be important to consider housing expenditure. The cost of housing may comprise 40 per cent or more of a household's expenditure. A pensioner couple who have paid off their house are considerably better off than a comparable couple paying rent. Similarly, young people on low wages living at home rent-free have much larger discretionary incomes than their peers living away from home and paying rent. On the other hand, certain aspects of the costs of housing are discretionary; individuals or couples may choose to spend a large proportion of their income on housing. Importantly, before and after-housing measures produce noticeably different levels of poverty (Harding, Lloyd & Greenwell 2001, pp. 35-6).

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1.2 Subjective poverty

A less common approach to measuring poverty is to ask people whether they see themselves as living in poverty. A person's own evaluation of whether he or she is living in poverty should not be disregarded. People will have a reasonably accurate idea about whether their financial situation is below what they regard as an acceptable standard. However, their opinions are necessarily subjective and may be reflective of past experiences and social context.

In the United Kingdom, Bradshaw and Finch (2003) asked respondents to estimate the amount of money necessary to keep households like theirs out of poverty. They were then asked the position of their households relative to this amount. Almost 20 per cent of households indicated that they were a little or a lot below their subjective poverty lines. However, there is little consensus on the minimum income required to live decently (Saunders 1998a).

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1.3 Financial stress

Australian research on financial stress has its origins in the 1986 Australian Standard of Living Survey (ASLS). In that survey, respondents were asked if, over the last two years, they had cut back on food and heating, fallen behind on bill or loan repayments or sought financial help. About 25 per cent said they had cut back on food, about 20 per cent had cut back on heating and almost 20 per cent had received financial help from family or relatives.

The 1998–99 Household Expenditure Survey (HES) also included items on cash flow problems in addition to items on deprivation.2 The results for cash flow items indicated that 15 per cent of households spent more money than they earned, 19 per cent were unable to raise $2,000 for an emergency, 16 per cent could not pay utility bills on time, 7 per cent could not pay car registration or insurance on time, 4 per cent pawned or sold something, 3 per cent went without meals, 2 per cent could not afford to heat their homes and 3 per cent sought assistance from welfare organisations. The incidence of financial stress was clearly related to income, but only a small number of households in the lowest income quartile were stressed on the individual indicators. The deprivation and cash flow items were used to construct a summary measure of financial stress comprising three levels: five or more incidences of financial stress defined high stress: two to four, moderate stress; and one or none, no stress (ABS 2002a; McColl, Pietsch & Gatenby 2001). About 13 per cent of households had high levels of financial stress, 21 per cent moderate stress and 66 per cent low or no stress.

Bray (2003a, 2003b) identified three components to financial stress after performing factor analyses on these items, as well as an item on living standards compared to a year ago. He described the three components as 'missing out', based mainly on the deprivation items; 'cash flow problems', based mainly on items about paying bills and borrowing money; and 'hardship', based on items tapping greater stress: going without meals, selling possessions or seeking help from community organisations. He classified about 3 per cent of households as experiencing 'multiple hardship', while 8 per cent experienced some hardship.

The 2002 Australian General Social Science Survey (GSS) included nine cash flow questions asked in a similar manner to the HES questionnaire.3 About 13 per cent of respondents were unable to pay their utility bills on time because of a shortage of money. Eight per cent sought financial help from friends and relatives. The incidence of cash flow problems in other areas was lower. Nearly 80 per cent of households had no incidences of financial stress, 9 per cent one incidence, 5 per cent two incidences and 6 per cent three or more incidences.

Measures of financial stress may not identify households that are 'truly' in poverty. The high incidence of not paying utility bills on time in these surveys may reflect priorities of households; they prioritise other spending knowing they can delay these payments for at least a short time. In contrast, it is more difficult to delay paying rent or servicing mortgages. On the other hand, families in financial difficulties may be able to pay bills, registration and insurance on time with credit cards, but in doing so, they increase their debt. The high incidence of seeking financial assistance from family or friends may include the borrowing of small amounts of money, which may not necessarily constitute financial stress. Much less ambiguity surrounds the other items: pawning or selling something for cash, not being able to heat the home, going without food and seeking help from welfare or community organisations. However, the results for these items indicate that very few households (no more than 5 per cent) are in financial stress.

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1.4 Poverty and risk factors

This section reviews studies on the relationships between poverty and demographic, sociological and economic factors. The first part of the review focuses on income poverty since few studies have explored its relationship with other measures of financial disadvantage. The second, much shorter part, reviews work on other indicators.

There are no strong differences between the sexes in income poverty, despite the fact that higher proportions of women head lone-parent families and work part-time. According to Harding, Lloyd and Greenwell (2001, p. 15), the risk of being in income poverty is no higher among women than men.

Younger people are more likely to be in income poverty than older people. On the before-housing half-mean income poverty measure with the Henderson equivalence measure, 16 per cent of 15 to 24 year-olds were in poverty in 2000, compared to 11 to 12 per cent of older age groups (Harding, Lloyd & Greenwell 2001, p. 17). Using the half-median measure, Korpi and Palme (1998) reported that poverty among Australians aged 65 and over was 5.2 per cent, compared to 9.1 per cent for the general population.

Poverty among those aged 65 and over is even lower after housing costs have been taken into account (Harding, Lloyd & Greenwell 2001, pp. 17, 19). This is because a sizeable proportion of older people have paid off their home loans and so have no housing costs. Saunders (1996) reported findings from the Australian Institute of Health and Welfare, with poverty among those aged 65 and older at 19 per cent on the before-housing measure but only 6 per cent after-housing.

Sole parents are at most risk of being in poverty. According to estimates from the Australian Institute of Health and Welfare, poverty was about three times higher among sole parents in 1989-90 (Saunders 1996). Using the before-housing half-mean income with Henderson equivalences, Harding, Lloyd and Greenwell (2001) estimated that 22 per cent of sole parents were in poverty, compared to 18 per cent of singles, 12 per cent of couples with children and 6 per cent of couples without children. Since 1990, the proportion of sole parents in poverty has declined. Among sole parents with two or more children, the poverty rate is over 25 per cent (Harding, Lloyd & Greenwell 2001, pp. 7-8). Eardley (1998) also found that income poverty, defined by half the median income, is associated with sole parenthood and larger families.

Low education is also associated with income poverty. Among those with no post-secondary qualifications, poverty (on the half-mean disposable income measure) was 15 per cent, compared to 11 per cent among those with diploma, certificate or trade qualifications and only 6 per cent among those with bachelor degrees (or higher) qualifications (Harding, Lloyd & Greenwell 2001, p. 14).

Poverty is strongly associated with labour force status. In 2000, nearly 60 per cent of the unemployed were in poverty. This compares with 17 per cent of those not in the labour force, 12 per cent of part-time workers and just 5 per cent of full-time workers. Among families with no wage earners, 28 per cent were in poverty in 2000 compared to less than 7 per cent of families with at least one full-time wage earner (Harding, Lloyd & Greenwell 2001, p. 12). Eardley (1998) found that among full-year full-time employees, poverty, defined by half the median income, was very low at around 1 per cent.

Johnson (1991) found wide variations in income poverty according to birthplace. He estimated the national poverty rate at 12.5 per cent in 1985-86. Although the poverty rate among all immigrants was only slightly higher at 14.6 per cent, it was around 30 per cent among immigrants from Asia and the Americas and 25 per cent among immigrants from Oceania. Poverty among Indigenous Australians was very high: about three times the rate of non-Indigenous families (Ross & Whiteford 1992).

This discussion on risk factors may give the impression that income poverty is limited to sole parents, the less educated, the unemployed and certain racial and ethnic minorities. This is not the case, however, since these groups are typically small. The numerically large groups comprise the bulk of those in poverty. Of those in poverty in 2000, 42 per cent were couples with children and a further 12 per cent were couples without children. Similarly, 45 per cent of those in poverty are aged between 25 and 49 (Harding, Lloyd & Greenwell 2001 pp. 9, 17).

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1.5 Other indicators of poverty

The author is not aware of any study that examines the relationship between demographic, sociological and other factors and subjective poverty.

The Department of Family and Community Services (FaCS 2003, p. 92) notes that expenditure poverty is high among elderly persons, no doubt because they have fewer financial obligations. In contrast, singles and couples are more likely to be in income poverty but not expenditure poverty.

There has been some research on the risk factors associated with financial stress. High levels of financial stress were more common among sole parents (41 per cent), the unemployed (45 per cent), and those on other government support pensions and allowances (40 per cent). Econometric analyses found that having a large family, being disabled, being a sole parent, being unemployed, having a mortgage, and paying interest on credit cards were associated with financial stress (McColl, Pietsch & Gatenby 2001).

Bray (2003b) found that 'multiple hardship' was highest among lone-parent households at around 14 per cent. Interestingly, couples with children had higher than average levels of 'missing out' and 'cash flow problems', but lower than average levels of 'hardship'. Young people were more likely to be experiencing cash flow problems.

Using data from the HILDA survey, la Cava and Simon (2003) reported that cash flow problems were negatively related to age, being in a couple without children, home ownership (and home value), disposable income and the number of credit cards, and was positively related to unemployment, family size, being a single parent and on being on welfare. Surprisingly, households with debt were generally less likely to experience cash flow problems.

Financial stress is related to income, but not as closely as often assumed. On nine indicators, financial stress was highest among households in the lowest income quintile, and declined in each subsequent quintile. Seventeen per cent of households in the lowest income quintile had two or more indicators of financial stress, compared to 12, 9 and 4 per cent of households in the top three quintiles respectively. However, 70 per cent of households in the lowest income quintile had experienced no cash flow problems in the previous 12 months (ABS 2004a).

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1.6 Interrelationships between indicators of financial disadvantage

As suggested by the surprisingly low levels of financial stress among households in the lowest income quartile, the correspondences between income and income poverty and other measures of financial disadvantage are not strong.

The correspondence between income poverty and expenditure poverty is much weaker than expected. Only 2.2 per cent of Australian households were in poverty on both the income and expenditure measures, when they are defined at 50 per cent of median income and median expenditure. If the thresholds are raised to 60 per cent, the proportion increases to 8 per cent (FaCS 2003, p. 92). Similarly, Saunders, Bradshaw and Hirst (2002) found that the poverty rate in the United Kingdom fell by about half, if it were defined in terms of both income and expenditure. They also introduced the concept of 'core' poverty to describe households that are in poverty on both the income and expenditure measures and whose expenditure exceeds household income. Only 2 per cent of households in the United Kingdom were found to be in core poverty. For Australia, Saunders (2004) estimated that 12 per cent of single-income households were in core poverty in 1998–99, about half the rate for either income or expenditure poverty.

In the United Kingdom the relationship between deprivation and income is weak. Those in persistent income poverty—defined as households with incomes less than 70 per cent of the median income over three years—were more likely to experience deprivation. However, only between one in eight and one in five of those in persistent poverty experienced multiple incidences of deprivation (Whelan, Layte & Maître 2002). The authors conclude that other factors beside persistent income poverty are important in determining deprivation, and these factors vary depending on the type of deprivation.

A similarly low correspondence was found for deprivation measures. Incidences of deprivation were clearly higher in the lowest income quartile, but deprivation was not unknown in higher income quintiles (McColl, Pietsch & Gatenby 2001). Travers and Robertson (1996, p. 25) reported a correlation of only 0.2 between a deprivation index and income among social security recipients.

Saunders (2004) found that if poverty is defined in terms of the HPL and experiencing one of the five core indicators of financial stress—could not pay car registration or insurance on time, pawned or sold something, went without meals, was unable to heat home and sought assistance from a welfare or community agency—the rate declined from 25 per cent to less than 10 per cent. Therefore, 60 per cent of households defined as being in poverty on the HPL measure had, in the past 12 months, no experience of financial stress when measured by these indicators. Similarly, Bray (2003b) concluded that although low incomes are associated with hardship, missing out and cash flow problems, only a relatively small proportion of low-income households experience these problems.

Similarly, subjective judgements of being poor are also not closely related to income, at least in the United Kingdom. Bradshaw and Finch (2003) concluded that there is 'surprisingly little overlap' between income poverty, deprivation and subjective poverty.

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1.7 Purpose of this paper

This paper contributes to the understanding of financial disadvantage in Australia by addressing areas not adequately covered by previous research.

Although there has been much work on the relationships between income poverty and demographic and social characteristics, the range of characteristics examined in a single paper has been fairly limited. For example, there are no recent Australian studies on the relationship between poverty and ethnicity or Indigenous status. Furthermore, we know little about the social reproduction of poverty in Australia, that is, the relationship between socioeconomic background and poverty. Finally, most Australian studies are limited to income poverty. The present paper examines the sociological and economic correlates of two other indicators of financial disadvantage, subjective poverty and financial stress, as well as income poverty.

Recent studies have not usually included multivariate analyses, which would enable identification of the independent effects of risk factors, that is, the effects of a factor on poverty taking into account the effects of other factors. For example, the analyses in the NATSEM report (Harding, Lloyd & Greenwell 2001) are bivariate analyses.

Researchers perform analyses on both the before-housing and after-housing income poverty measures. In the Australian and overseas literature, the before-housing measure is more frequently used and is usually the headline figure. However, the after-housing measure is arguably a better indicator of a household's financial situation given that a substantial proportion of owner-occupiers own their properties outright, the mortgage repayments of first home buyers are usually sizeable, and non-home owners almost invariably pay rent. Although the NATSEM report identified different relationships between before and after-housing measures of poverty and age, it did not systematically compare the effects of sociological and economic factors on before and after-housing poverty (Harding, Lloyd & Greenwell 2001).

Another contribution of this paper is to include income, wealth, assets and debt in the analysis of financial disadvantage. It is apparent from the literature that the correspondence between income-based and non-income based measures of wealth are weaker than expected. This may be a result of the income measures used. This paper examines the relationships of subjective poverty and financial stress with a range of income measures (individual, household, disposable and equivalised). No Australian study has compared the relationships these three indicators of financial disadvantage have with wealth, assets and debt.

Finally, this paper examines the interrelationships between the three financial disadvantage measures and their stability over time. Such analyses estimate the proportion of individuals who are financially disadvantaged on two or three indicators, and the movement of people into and out of financial disadvantage according to each indicator.

The purpose of this paper, therefore, is to examine before and after-housing income poverty, subjective poverty and financial stress in Australia using the first two waves of the HILDA survey.

The specific aims of this paper are outlined below.

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2. Data, measures and analysis

Summary of main findings