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

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. 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. The views expressed in this paper are those of the staff involved and do not necessarily reflect those of the Productivity Commission.