Australian Bureau of Statistics
4160.0 - Measuring Wellbeing: Frameworks for Australian Social Statistics, 2001
Latest ISSUE Released at 11:30 AM (CANBERRA TIME) 12/10/2001
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The refinements in the final two equations are necessary for two main reasons. First, it is not sensible to include lumpy or irregular receipts of economic resources as a part of income. Such receipts, (e.g. inheritances), are often added directly to a household's stock of wealth for future use, rather than being used up in the same period. They are best viewed as capital transfers. Second, a household's wealth can rise or fall without the household making any economic transactions. These 'other changes in wealth', as referred to in the last equation, can occur because of changes in the market value of the resources owned by the household. Thus, for example, a house may appreciate in value over time. The real (allowing for inflation) net effect of such changes for all the economic resources owned by a household are referred to as real net capital gains or real net holding gains. Households may also lose their assets, or the value of some of their assets, through mishaps, such as fire and floods.
Of course changes in wealth may be assessed without regard to the flows described above. This can be done by measuring the value of economic resources owned by the household at two points in time and then taking the difference between the two.
The equations described above form the basis for the more detailed information models, presented in the SNA/ASNA and ICW frameworks, which classify particular types of receipts and disbursements and particular types of assets and liabilities within a fully integrated set of accounts. The sequence of accounts are of the sort commonly used by accountants to monitor business activities and outcomes. In the case of micro level household statistics such accounts are not actually constructed: their role is to clarify the theoretical foundations for each of the concepts - income, consumption, wealth, and so on - used to measure economic wellbeing.
One of the most commonly referred to accounts is known as the 'current account'. This corresponds with the second equation described above. In theory, it is used to identify all the regular receipts of income against current consumption (that is, the use of goods and services) and thus provides the means for calculating the net outcome, namely saving. The other accounts are used to monitor changes in wealth that occur for reasons other than, and in addition to, those made from saving. They record the changes affecting the value of different assets and liabilities that households have at different points in time and so provide a means for measuring and analysing their net worth.
While the term income is in common use, it means different things to different people and is defined in different ways according to use. Among economists, statisticians and accountants there has been a long history of debate on the boundaries that should be set for the income concept and although the conceptual models adopted by the ABS (namely the SNA, ASNA and ICW frameworks) give recognition to the same principles in defining income, the actual boundaries differ in their detail. The following describes the principles that underlie the concept
'. . . it would seem that we ought to define a man's income as the maximum value he can consume during a week, and still expect to be as well off at the end of the week as he was at the beginning.' (Hicks, 1946).1
Similar notions are used in the System of National Accounts 1993 (SNA93) where disposable income is described as being:
'. . . the maximum amount that a household or other unit can afford to spend on consumption goods or services during the accounting period without having to finance its expenditure by reducing its cash, by disposing of other financial or non-financial assets or by increasing its liabilities.' (SNA93 para 8.15).2
In both cases household income is defined in terms of its availability for current consumption which is regarded as giving the best indicator of a household's economic wellbeing. The connection with consumption offers a rationale for limiting household receipts of resources to those that are most likely to impact on their current consumption. Thus, household income is defined as comprising receipts (in cash or in kind) that accrue on a regular and recurring basis. In practice, it usually refers to receipts that occur at annual or more frequent intervals and such receipts are presented as average weekly equivalents. In contrast, large irregular receipts that occur within an accounting period are considered to be additions to a household’s stock of assets. However, by convention, the treatment of particular types of irregular receipts can differ from this general rule and so be included as income. Thus, for example, work related redundancy or termination payments are included as a component of income in both the SNA and ICW frameworks.
Furthermore, the concept considered to best reflect the amount available for regular household use is that of disposable income. Not all income is available for consumption because some is obligated to others. Disposable income is often simply measured as gross cash income minus direct taxes. However, as recommended by the Canberra Group, other regular and recurring transfers, such as those provided to other households (as is the case with some child support payments) may also be deducted to provide more refined measures of disposable income.
It should be noted that there are other notions of income that are sometimes also used to measure economic wellbeing. Thus the notion of 'final income', which takes into account indirect government taxes that are ultimately paid by households and indirect benefits received through government expenditures on various community services, is one that has also been used by the ABS in studies of the economic wellbeing of different household types.3
SOURCES OF INCOME
People can obtain an income from various sources. Important among these is cash income received from employment, either as an employee or from self employment, cash income received from assets loaned to others in return for payment, and regular cash transfers received from government or other sources. They may also receive non-cash benefits, that is, income-in-kind, from various sources. A good classification of sources of income is important to studies of income distribution as it helps to describe the dependencies individual households have on those sources for their wellbeing. The classification of sources of income provided by the Canberra Group that is presented on the following page, which is very similar to (but not the same as) that presented in SNA93, describes the most recent thinking on the specific sources of income that might be separately identified in micro level statistics. While there are some differences between these categories and those used in previous ABS household income distribution surveys, it should be recognised that the information available from those surveys largely accords with the broad level classification of income presented by the Canberra Group.
The Canberra Group classification also serves to identify those sources of income for which information about the amounts received (their dollar value) is most readily available from households themselves and those whose dollar value can only be realistically measured by reference to additional sources of information, as is generally the case with non-cash components of income.
In micro level survey data relating to households, household income (both gross and disposable) is most commonly measured by the ABS, as by most other statistical agencies, as the cash amounts received; income-in-kind is excluded. Nevertheless, the effects of some of the more significant non-cash components received by households on the distribution of economic wellbeing have been examined in special studies undertaken by the ABS and other researchers. These include studies of the value of income from owner occupied dwellings;4 the value of unpaid household work;5 and of the value of 'social transfers in kind' (STIK) received from government expenditures on services targeted to meeting specific human needs.6 The last of these (sometimes known as fiscal incidence studies) have been a particular focus of ABS attention. As well as measuring the benefits received from government expenditures on various services such as health, education and housing, these studies have simultaneously shown the effect of other elements of the tax-transfer system on the economic wellbeing of households. Consideration of the value of such benefits, on top of other sources of income received, has provided much wider views of economic wellbeing than those provided by looking at the more readily available measures such as total (gross) and disposable cash income.
In the ICW framework, household consumption refers to the process of 'using up' goods and services and in economic terms refers to the monetary value of the goods and services consumed for the direct satisfaction of household needs or wants within a given reference period. The reference period most commonly used is a year. This period helps to take account of different seasonal patterns in the nature of goods and services consumed, but, as with income, the value of consumption is often averaged out to weekly equivalents. When thinking of a household's consumption of economic resources accountants and economists often value consumption on the basis of people's expenditures on goods and services, and when thinking of owner occupied dwellings or durable goods the value of the service that comes from using those goods. The notion of consumption, as just defined, is similar to that used in the SNA93 (and ASNA) frameworks.
DURABLE AND NON-DURABLE GOODS
The specification of a reference period is important when measuring consumption because it imposes conditions on how the consumption of particular goods used by a household should ideally be valued. Hence the distinction between non-durable and durable goods. Since non-durables, such as food, tend to be consumed soon after their acquisition their economic value may be thought of in terms of their current market or purchase price. However, as durable goods are often consumed over a long period of time (consider for example, a car or a refrigerator) the economic value of the use of those goods, or rather the use of the services provided by those goods, within the given reference period, cannot be determined from the current market value of the full cost of purchasing that durable good. To economists the real value of the services provided by durable goods must be considered by reference to the market (or rental) value of the services of those goods over the period that they are used. While this rental value approach is adopted when estimating the consumption value of owner-occupied housing, it is relevant to note that estimates of the real consumption value of services obtained from household durables are rarely, if ever, produced. Within the SNA /ASNA frameworks, with the exception of owner occupied housing and valuables, such as precious stones and antiques, household durables are treated as being completely consumed within the reference period, and are valued in terms of their full purchase price.
ACTUAL FINAL CONSUMPTION
The ICW framework further organises ideas about consumption according to the total disbursements that a household makes from their disposable income with respect to their actual final consumption. Some household disbursements involve the giving of gifts (cash or in kind) to other households and charities. Such transfers are excluded from actual final consumption which, as in SNA93, refers to goods and services used by households themselves to satisfy their wants and needs. Actual final consumption is then conceptualised, as seen in the following diagram, according to the source of goods and services and, if from outside the household, how they were obtained. There are three broad categories; final consumption expenditure (which refers to that part that is purchased in the market place with money and includes the value of indirect taxes paid); consumption of in-kind receipts from outside the household; and consumption of goods and services provided from within the household.
Complete micro-level statistics on levels of actual final consumption, as inferred by the previous diagram, are rarely provided by statistical agencies. In Australia, where households typically purchase most of the things they need and want, much of the attention is given to measuring the final consumption expenditure component in order to provide indicators of household wellbeing. However, other elements of consumption, such as the value of owner occupied housing, unpaid household work, and receipts of government services are, as previously noted, sometimes measured in special studies. Such studies tend to measure and analyse these elements as components of income rather than consumption, although they belong with both.
CLASSIFICATION OF EXPENDITURES
There are obviously many different goods and services that people can purchase and consume that may be included in final consumption expenditure. Classifying detailed expenditure items into broad groups facilitates the analysis of expenditure patterns. In ABS Household Expenditure Surveys (HESs) household expenditures are classified into 13 broad expenditure groups. For the 1998-99 HES, this involved grouping information for some 609 detailed expenditure items. Data for groups of expenditure items at an intermediate or minor group level are also available.
Saving is that part of a household's disposable income that is not spent on final consumption of goods and services. It may be positive or negative depending on whether disposable income exceeds final consumption expenditure, or vice versa. If saving is positive, then the unspent income will have been used to increase a household's assets (which may include financial assets, including holdings of cash balances, and non-financial assets) or reduce their liabilities (such as reducing the size of a mortgage). If saving is negative, some financial or non-financial assets must have been liquidated, cash balances run down, or some liabilities increased. Whichever direction, saving affects the net worth of the household. The concept of saving, as just described, is the same in the ICW, the SNA and the ASNA. However differences exist to the extent that definitions of income and consumption differ.
A household's wealth at any given point in time is defined as the difference between its stock of assets and its stock of liabilities. Because it is a net value, which may be either positive or negative, wealth is more appropriately referred to as 'net worth'.
Unlike the flows of income, consumption and saving, net worth is a stock figure. It changes over time by being added to through saving and capital transfers. It may also be depleted by incurring liabilities, by liquidating assets to finance consumption, or by transferring assets to another entity such as a charity or the household of a family relation. Net worth may also change without there being any transactions. For example, a household's share holdings may increase or decrease in value as a result of changes in stock market prices; such changes can occur for other assets as well, such as property.
In the ICW framework assets are defined as resources owned or being purchased by the household from which benefits may be derived by their owners by holding or using them over a period of time. Assets are divided into two categories, financial and non-financial. Financial assets include items such as cash, shares and equity in life insurance or pension funds. The most common non-financial asset in Australia is the family home. Non-financial assets also include valuables (jewellery and the like), consumer durables such as the family car, and plant or machinery owned by unincorporated enterprises owned by the household. Liabilities, on the other hand, are defined as obligations on the part of the household to make a payment, or series of payments, to the owners of financial assets. For many Australian households, the largest liability they have is the mortgage on the family home. They may also have other loans, bank overdrafts or credit card debt. Loans outstanding to family members in other households are also included as liabilities.
The value of a household's net worth plays an important part in its economic wellbeing. It may earn a return to the household in the form of income from interest, rent or dividends. However, it also affects the broader economic power of the household. For example, households with a high level of wealth will find it easier to gain credit for investment or to maximise the choice of timing for different types of consumption. For these reasons it is important to ascertain, if possible, the value of the household's net worth to give a complete picture of a household's economic wellbeing.
The following classification of assets and liabilities, adapted from the classification presented in the Australian System of National Accounts, has been used in special ABS studies;7 which, bringing together data from the national accounts and households surveys through the social accounting matrix approach, have sought to reveal the distribution of wealth among households.
A useful complementary framework for addressing needs for statistical information is to consider the nature of the many interactions and interdependencies that people have with others in the process of generating, distributing and using economic resources. Some examples of interactions involving exchanges of economic resources are illustrated in the diagram below. Many of these transactions have been explicitly recognised as either sources of income, or forms of consumption in the frameworks described above; however, the transactions model below provides an alternative perspective of these flows.
A number of the components illustrated in the model can be associated with those used in SNA93 which, at its broadest level, identifies corporations (non-financial and financial), governments, households and non-profit institutions as making up key institutional sectors within the national economy. However, as presented in the diagram, the model also reveals that transactions within a household's core community, (namely, among immediate family members, other relatives, and friends) may be important in shaping an individuals economic wellbeing.
Controversy over practical measures of income, consumption and wealth that might be provided by statistical agencies are often concerned with the types of economic resources that should be included which in turn is often related to the practicability of acquiring the necessary information. For example, where information about receipts of economic resources is limited, income is often solely defined as the cash receipts that people receive. The non-cash components are commonly excluded.
The term ‘regular and recurring’ used to define income has to be interpreted reasonably broadly. For example, contract employees are increasingly being paid on a lump-sum basis for work done over an extended period. Casual employment, with accompanying changes in the regularity of income, has also become more common. Similarly, self-employed people, especially in industries such as agriculture, can have quite irregular income streams.
Household surveys provide the primary means for obtaining information to support distributional studies of wellbeing. Obtaining high quality data in household surveys is an issue for all types of information collected. However, the collection of data that accurately describes the economic wellbeing of households can be particularly difficult to obtain. This is partly because complete and accurate records of income, assets, liabilities and expenditure are rarely maintained by households themselves and the collection of such information can involve a great deal of work for respondents. On the expenditure side, for example, households included in Household Expenditure Surveys, are asked to maintain a record of all their expenditures over a two-week period in written diaries as well as report on various large expenditure items relating to an extended 'recall period' during interview. In addition, many people regard their financial matters as being private and may as a result not be fully cooperative in providing full details of their income and expenditure.
Where data about the value of economic resources available to households are not collected from households themselves there are possibilities for imputing such information. Imputation by reference to information from other sources is widely used for valuing non-cash income. However, this too can be difficult specially where other needed data sources are not readily available. Finding practical ways for obtaining reliable data which usefully describes people's economic circumstances is therefore an on-going issue of concern.
INCOME FROM SELF EMPLOYMENT
On the income side a particular area of difficulty relates to obtaining accurate information about income from self employment. This may be facilitated by reference to business accounts but for many small businesses these have in the past not always been available, or if available, have been seen to be potentially unreliable. This reflects, in part, the difficulty of distinguishing between business and personal components of income and expenditure. One of the concerns about the quality of information relating to income from self employment is that it is often very low, or negative, in value. Of course this is possible. A negative cash income results if operating costs and depreciation are greater than the gross receipts. However, analysis of household expenditure data for households with low or negative business incomes has often revealed that many of these households have expenditures that are much higher than that expected from their income.
In some cases, low or negative income from self employment will not be associated with low standards of living because the low income is part of an expected cycle of high and low results in a volatile industry such as agriculture. In the short term, low business income may reflect a significant depreciation allowance that offsets a higher level of cash receipts that do not immediately have to be spent on capital replacement. Whatever the reason for low and negative values, as a measure of the standard of living, business income is fairly unsatisfactory and needs to be used with caution. Additional data on consumption of households with business income may assist analysis.
Notwithstanding the conceptual relationships, a measure of a household's saving cannot simply be deduced from the difference between measures of their income and expenditure, as obtained from household expenditure surveys. Such subtraction often implies a level of dissaving for the lower income groups which is not considered to reflect the actual situation. There are various reasons for this. One relates to the fact that available measures of income and expenditure do not fully account for all income and all consumption as set out in the conceptual models, so the information available is incomplete. Another relates to the fact that there are often significant timing differences between the income and expenditure components actually collected in such surveys. Indications of saving outcomes for households have sometimes been obtained by asking households to give subjective assessments of their ability to save.
The economic wellbeing of individuals is typically assessed at the family or household level. This shift in focus occurs because in living together with others people typically share some, or all, of their economic resources with those with whom they live so individuals benefit from the pooling of resources. This is most obvious in the case of young children who depend on the income of their parents for their wellbeing.
Other counting units, such as units to whom social security benefits are paid, closely approximated in composition by the counting unit known as 'income units', present themselves as alternative units of measurement. Income units, families and households are all relatively small, they all involve people who live together, but differ in membership in terms of personal relationships (whether family members or not) and further according to the likelihood that certain resources will be shared among individual members (whether members are considered to be inter-dependent on income or not).
Counting units involving individuals that are most likely to have strong inter-dependencies might be considered to be preferable in studying the distribution of economic wellbeing because sharing of income and goods and services is more likely to take place in such circumstances. Yet there is little doubt that unrelated people who form households also derive benefits from living together, some simply arise from economies of scale. As the exact nature of sharing that takes place within households (or counting units within households) can only be assumed, the choice of which one to use can be difficult. Which one is best depends on the issue of concern, the types of transactions being considered, and the services being delivered and consumed. For instance, income units have been important units of analysis to government agencies concerned with organising payments of pensions and benefits because the government recognises that responsible adults within such units have obligations to share resources with others within the unit. In practice each of the units - households, families, income units and persons - are widely used when analysing receipts of income (see page 16 for definitions).
When all aspects of economic wellbeing are being considered the household is the preferred unit because of the practical need to aggregate to this level when dealing with data on consumption and assets. A good deal of consumption relates to items which are used by the household as a whole (buying white goods, paying rates and electricity/water bills). Moreover a substantial proportion of income-in-kind is also generated by the household economy. Such income-in-kind includes unpaid household work, imputed rent of owner-occupied dwellings and the value of services provided by household consumer durables.
The use of counting units in which individual units may differ in size and composition, such as households, families or income units, presents difficulties for identifying those people that are relatively well off from those not so well off. This is because the size and composition of any unit affects its need for economic resources. For example, it would be expected that a household consisting of just one person would normally need less income to enjoy the same standard of living as a household with two or more people. One way of adjusting for this difference might be to simply divide the income of the unit by the number of people within the unit so that all income is presented on a per capita basis. However, such an adjustment assumes all individuals have the same resource needs to enjoy the same standard of living and that there are no economies derived from living together.
Various calibrations, know as equivalence scales, have been devised to make adjustments to the actual incomes of counting units in a way that recognises differences in needs of individuals within those units and the economies that flow from sharing resources. The scales differ in their detail and complexity but commonly recognise that the extra level of resources required by larger groups of people is not directly proportional to the number of people. They also typically recognise that children have fewer needs than adults.
Equivalence scales are generally based on subjective judgements on the different needs of household members. For this reason, and in the absence of an international standard, the ABS does not have an official set of equivalence scales for use. Rather, the ABS publishes equivalent income using a number of alternative scales to provide some sensitivity analysis on the effects of these scales on the measurement of economic wellbeing. More detail on equivalence scales and technical notes on their use can be found in the ABS income survey publications.8
The term poverty has various meanings. However, when considered in economic terms poverty is most commonly measured on the basis of people's cash income. In some countries the notion of absolute poverty is important and has been defined in terms of a minimum base level of income needed to obtain sufficient calories, clean water, and adequate clothing and shelter. However, this is not appropriate in affluent countries such as Australia. One alternative approach has been to define poverty in terms of a base level of income regarded as being essential for people to participate in activities that the society regards as normal. Clearly it can be very hard to prescribe what the base level is, and to determine how it shifts over time. In Australia a poverty line (describing a base level income needed to live a decent life) was developed by Professor Henderson for the 1975 Commission of Inquiry into Poverty;9 and, after adjusting for the general rises in income, is still used in some contemporary studies of poverty in Australia. In research supported by the Department of Family and Community Services more recent systematic attempts to define a basic range of goods and services needed to maintain an adequate standard of living has helped to update thinking on suitable levels of income required to keep people out of poverty.10
An alternative approach, more commonly adopted, is to choose a certain level of income at the lower end of the income distribution to delineate relative poverty. Relative poverty is a measure of disadvantage derived by comparing a household's income to others in the community. By international convention, the low income cut-offs commonly used to identify those in relative poverty are set as a proportion, usually one half, of either average income or median income, after incomes have been adjusted using equivalence scales.
It is important to note that measures of people in poverty on the basis of income can be misleading because people can have low incomes yet still have high levels of consumption, as is sometimes the case for people with self employment income. As previously discussed, this discordance can occur for a variety of reasons reflecting people's actual circumstances. However, it suggests that alternative approaches to measuring poverty such as those based on levels of consumption would also be useful.
Prices of goods and services can change over time due to inflationary pressures. When providing time series comparisons of income or expenditure it can be desirable to compare real changes in levels of income or expenditure which remove the effects of inflation. Ideally any price index applied should be consistent in definition with the measure to which it is applied. For example, a price index applied to disposable income would ideally capture those consumption items that might be purchased from disposable income while one relating to expenditure on food would be applied to measures of household expenditure on food. Usually, because of its ready availability, the consumer price index or one of its sub-indices is applied. However, other indexes such as the chain price index for Household Final Consumption Expenditure provided by the national accounts are also used.
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