Cohort Differences of Participation Tax Rates in Australia: A Life-Cycle Perspective Using Shapley-Owen and Oaxaca Decompositions

This paper investigates the cohort differences and life-cycle dynamics of Participation Tax Rates (PTRs) in Australia using data from the Household, Income and Labour Dynamics in Australia (HILDA) Survey (2001-2019). Employing Shapley-Owen and Oaxaca decomposition techniques, we examine how PTRs vary across different birth cohorts, Baby Boomers, Generation X, and Millennials, and throughout their life stages. We find that PTRs follow distinct patterns across the life cycle, peaking during individuals’ mid-30s to early 40s when family responsibilities and eligibility for child-related benefits are highest. These patterns also differ across generations, with Baby Boomer cohorts experiencing notably higher PTRs compared to younger generations, potentially contributing to generational differences in labour force participation. Our decomposition analyses reveal that demographic factors, particularly family composition and the presence of young children, are the primary drivers of these PTR differences, accounting for over 90% of the variation on average. While Australia’s tax and transfer system effectively supports families with young children, these findings indicate that it may inadvertently create higher work disincentives for certain demographic groups, particularly secondary earners. Moreover, these disincentives are unequally distributed across generations, highlighting the importance of considering long-term impacts in the design and implementation of tax and transfer policies.