Antonia Settle, Melbourne Institute- A middle income squeeze? The changing dynamics of financial stress

Title: A middle income squeeze? The changing dynamics of financial stress

Abstract: Recent developments in real estate markets add pressure to what many see as a ‘middle income squeeze’, by which middle income households are tied into ever tighter balance sheet positions as costs rise for housing, education and healthcare amidst stagnating wages (OECD, 2019). Evidence for this in Australia comes not only from growing mortgage debt but from the literature that assesses change in Australian households’ marginal propensities to consume (Lim & Tsiaplias, 2017; Cho, Morley & Singh, 2019; Kaplan, Violante & Weidner, 2014) and the potential for deleveraging behaviour (Price, Beckers & La Cava, 2019; Kearns, Major & Norman, 2020). This paper uses a probit model to examine how the determinants of financial stress have changed since 2002, when earlier literature first mapped out the links between financial stress and household characteristics (Breunig & Cobb-Clarke, 2004; Worthington, 2006). Consistent with the middle income squeeze hypothesis, the analysis finds that financial stress is indeed rising up the income distribution, with both net worth and income providing weaker protection from financial stress in 2018 than in 2002. Similarly, renters and mortgagees are found to have a higher propensity to stress in comparison to outright homeowners then they did in 2002. Moreover the analysis finds that these patterns intensify when the focus is narrowed to the middle three quintiles of income and net worth. These findings suggest that, although financial stress has reduced considerably between 2002 and 2018, middle income groups have captured less of the reduction in financial stress than other groups.

Presenter: Antonia Settle, Melbourne Institute

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