RDP 2022-06: Do Australian Households Borrow to Keep up with the Joneses? 7. Conclusion

While the relationship between local income inequality and financial behaviour of households has received a lot of attention in recent years, empirical evidence at the household level is scarce and inconclusive. Exploiting the very rich longitudinal household data from the HILDA Surveys, combined with income inequality data at an SA3 level from the ABS, I estimate the effect of a change in local income inequality on Australian household debt accumulation across different types of debt and how the effect varies by household demographic and financial characteristics.

I find that households significantly increase their investment debt and, to a lesser degree, car debt, following an increase in local income inequality. Heterogeneity analyses reveal that the effect is strongest for middle-aged, middle-income mortgagors with financial capacity and a willingness to take financial risk. These results shed additional light on the mechanisms and macroeconomic implications of the relationship between local inequality and household borrowing. More specifically, the paper lends evidence to the ‘keeping up with the Joneses’ dynamics, both via closing the consumption gap (with car debt) and closing the income gap (with investment debt). However, since households who exhibit such behaviour are well resourced, there does not appear to be a macrofinancial stability concern associated with the effect of local inequality on household indebtedness in Australia.

The findings in this paper highlight a number of areas for future research. In particular, the finding that households appear to try to close the income gap by borrowing more for investment leads to a natural question: Do households also try to ‘keep up with the Joneses’ through other channels? For example, could there be a link between local income inequality and labour supply decisions, such as secondary earners increasing their labour force participation? Or could individuals look to close the income gap by investing in their human capital to raise their earning potential? These questions are left to future research.