Understanding the factors associated with financial stress in Australian households
Robert Breunig and Deborah Cobb-Clark
Australian National University
Contact Email:   Robert.Breuniganu.edu.au

The objective of this project is to address the following question: How do household characteristics, for example, household size, the age structure of children, disability status and labour market activity, affect a household's propensity to report experiencing financial stress? How do these relationships change as one moves up the income-scale (say from low to middle to high income)? Answers to these questions are important in identifying vulnerable groups within Australian Society and will be informative about any potential changes in payments within the social security system.

To address these objectives, we will use the recently released Living in Australia (Household Income and Labour Dynamics in Australia, HILDA) survey. HILDA contains information about the extent to which a household reports being in financial stress. HILDA respondents answered detailed questions about a range of issues associated with financial stress including, the ability to raise funds in emergencies, foregone consumption, difficulties with cash flow, etc. This data set also contains detailed demographic information on respondents and the family and household structures in which they live. HILDA, a panel data set, will allow us to follow respondents over time. As subsequent waves of data are released, we will thus be able to address additional questions relating to the duration and persistence of financial stress in Australian households.

In order to answer these questions, the first wave of HILDA data will be used to estimate a series of equivalence scales based on financial stress and relative deprivation. This approach will allow us to make explicit comparisons using income as the metric in the propensities of different households to be in financial stress. For example, equivalence scales allow us to estimate how much additional income a household with two children would require in order to avoid missing out on meals as compared to an otherwise similar household with no children. This has the advantage of allowing us to measure deprivation directly in preference to focusing on income (or expenditure) in isolation.

The primary purpose of adopting this method is not to specifically derive a set of equivalence scales for FaCS use, but rather to shed light on how household composition affects the propensity for a household to be in financial stress.

The first step of the project will be to develop an index from the HILDA data items on financial stress. The index could operate as a single index of financial stress, or could be subdivided into the sub-indices of missing out, hardship, and cash-flow problems. It is also anticipated that specific data items which are particularly relevant to the dimensions of financial stress may be analysed separately.

The second step of the project will be to use both parametric and non-parametric methods to estimate the equivalence scale implied by the data. The resulting equivalence scales can then be compared to existing equivalence scales (for example, Henderson, square-root, OECD, etc.). These equivalence scales can then be used to assess the relative importance of specific household characteristics in producing financial stress.

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