The education sector is a critical factor in the economy’s technological advancement. Rapid technological changes require the education sector to retrain labour for optimal capital-labour complementarity. The robustly observed consequence of this process is an increase in inequality. For example, computers (or steam engines) are only useful if workers know how to use them. However, those workers who do will be rewarded better than the rest. This skill-biased technical change (SBTC) applies to organisational technologies too. 

A recent paper shows that the economic transition of the 1990s, which is viewed as a separate field of economics, can be parsimoniously reinterpreted as a particular case of SBTC. This view uniformly explains two actively researched areas of the Russian labour market: (1) the expansion of education and (2) the drop in the college wage premium. Using reduced form and structural models applied to the Russian household survey, the work shows that the reason for both is a massive demand-side shock for law and business (LB) skills driven by the reorganisation of the Russian economy. 

Figure 1: Russian economic output and college returns. Notes: Red dotted line is GDP per capita (right axis). Blue circles are the return on the college degree (left axis). The dashed vertical line separates periods: the Soviet, transition, and nowadays. Source: Alexeev (2022).

The paper starts by replicating the drop in the Russian college wage premium (Figure 1). Then, using novel data techniques, it scrutinises the supply side of the Russian labour market. Figure 2 shows the share of all employed workers with higher education from 1985 until 2015. A pronounced tendency can be seen: in 1985, LB graduates occupied approximately 3% of the employed workers, whereas, in 2015, it was 12%. Thus, the reason for the expansion of education was to saturate the market economy with the skills of LB graduates, which had neither demand nor supply in the command economy.

Figure 2: Share of graduates with higher education in the labour force. Source: Alexeev (2022).

A measurable price signal must accompany a change of this magnitude. Therefore, I reestimate the college return, allowing LB to have a separate value. Figure 3 confirms that there has been a massive increase in the return on LB graduates’ skills, with a subsequent drop. The overall wage premium in Figure 1 (a weighted average across all specialisations) mimics this massive transitory between-majors differential, explaining the puzzling decline in college returns that started in 1998.

Figure 3: Return of LB and other college graduates. Notes: The figure shows the estimate of the wage equation. Vertical grey dashed lines separate the periods, as in Figure 1. Dotted lines are locally weighted scatterplot smoothers. Source: Alexeev (2022).

Then the paper formulates and estimates a novel structural model to explicitly establish that the demand for LB skills is behind these returns. The structural model also shows that an economywide deficiency of LB skills can reduce economic performance, linking the demand shock with the GDP drop shown in Figure 1. 

To test this implication, the work shows that the size of the between-majors differential positively correlates with the recession in a cross-sectional sample of transitional economies. To proxy for the differential, the work uses the share of LB students in all enrolled students (easily accessible statistic). The logic for this proxy is that, as labour markets are competitive, an unusually high proportion of enrollments into the specialisation implies the desired wage differential.

Figure 4: GDP loss and recomposition of skills during the transition. Notes: The GDP loss is a percentage decrease of real GDP during the transitional recession. The share of LB graduates is their percentage in tertiary institutions after the transitional recession. Source: Alexeev (2022).

Apart from offering a uniform theory that links the transformation recension, college expansion and changes in college returns, this paper shows the importance of studying the technology-induced differentials within skilled labour. These differentials are known to be present in modern economies today due to a new wave of adaptation of high-return technologies (e.g., AI).

These differentials deserve further scrutiny on empirical and conceptual levels, as they are known to cause unexpected and (as the Russian case shows) severe drops in economic performance and income equality. These two effects in isolation are temporal, but if they are incorrectly interpreted, and the policy response is suboptimal, severe adverse consequences will follow.

(Lacking the skill to navigate the contractual and informational imperfections of the market economy, Russian businesses of the early 1990s executed bargaining powers using `crimson jackets.’ One of these is shown in the feature image at the top.)

Young parents are often surprised when they realise that punishment does not work for their children very well, if at all. The reason is the assumption of rationality that has to be satisfied for the punishment to have the expected effect. The target of the punishment is assumed to be free to make choices and govern them by understanding the trade-offs. The assumption obviously fails for children. Some parents, as a joke, even equate their children with miniature drunks. They bump into things, laugh, cry, and fall asleep on toilets.

This intuition carries over into many other settings. The assumption of rationality fails in a large class of crimes. In these crimes, the offender’s behaviour is so heavily preconditioned by the socioeconomic environment that they effectively lose agency in their actions. A leading example of these crimes is illicit drug use.

Criminal justice system as an ongoing trial

Most drug users apprehended by the police are sanctioned. This “lesson” aims to discourage users from using drugs or committing any other crimes in the future. But does it? Our new study, which uses a novel robust design, shows that fining users of illicit drugs does not achieve these goals. All it does is saddle users with debt. 

How do we know that fining those who use illicit drugs does not work as intended? We cannot run an experiment, as it would be highly unethical. Instead, we use a quasi-experimental design that ingeniously combines two aspects of the criminal justice system.

The first aspect is the “equality before the law” principle that all cases should be treated impartially. In practice, this is implemented by randomly assigning judges to cases. The second aspect of the design is judicial disparity. Some judges are more likely to select a penalty than others. So for a given case and knowing the judge, we can predict the verdict. This prediction and the fact that defendants face judges randomly allow us to interpret the criminal justice system as a large-scale randomised trial, where each judge is a treatment arm.

This is the cutting-edge design that is currently revolutionising the field of criminology. It allows receiving convincing answers to challenging and otherwise intractable questions. The design has been recently used in highly influential studies in the USA and Europe. One thought-provoking discovery underpinned by this design is that parental incarceration may be beneficial for a child. This is because parental figures prone to criminal activity transmit criminal behaviour to a child, while incarceration severs this transmission. Treating other factors unchanged, this severance benefits the child.

Pain for pain’s sake?

In our study, we focus on the NSW population of drug use offenders and ask if fining them affects three future outcomes: (1) any crimes committed following the fine; (2) any drug crimes committed; and, lastly, (3) any drug crime involving the same drug as the one that attracted the fine. 

Before applying the quasi-experimental design, we first treat the data as an observational follow-up (cohort) study (the traditional approach in medicine or criminology). We show that the fine did not only not discourage criminal activities but also exacerbated the problem, as those fined were more likely to commit crimes in future. Australian penal abolitionists commonly cite findings of this sort to support their views.

But there’s a problem with this approach. For example, to some extent, the fines do not make people re-offend, but people who get fined are more likely to be serious or repeat offenders. However, the follow-up design mistakenly attributes all possible reasons for re-offending to the punishment.

The results are different when we use the allocation of judges to cases to randomise fines among defendants. Similarly to a randomised trial, this design pins down the causal effect of fine on the outcomes. None of the estimates is statistically significant. The fine does not reduce the probability of future crimes. Not only that, but they also do not cause future crime, as many fear. 

In effect, fining those who use illicit drugs is simply taxing (or licensing) them. It’s a regressive tax because most of those arrested for drug use reside in lower-income neighbourhoods. This is a meaningless policy objective and, one could argue, a waste of chronically overused criminal justice system resources.

The lesson

Sanctioning can be a powerful tool to promote public safety. For example, the same quasi-experimental design has convincingly shown that imprisonment can reduce criminal activity reliably and substantially. But generalising this conclusion to drug offenders is dangerous, as it ignores the complexity of the addiction epidemic and fools us into complacency.

Regardless of how the public feels about the drugs, criminalising addiction does not work (except in the rarest cases). A feasible way out of the addiction epidemic involves a combination of many different approaches, united by the principle of harm reduction. 

The Wire, a successful TV show, offers a great visual introduction to this approach. A key third-season storyline is the creation of “free zones,” in which illicit drugs could be sold and used without police interference as long as there is no violence. Crime rates dropped, the use and sale of substances were kept out of the public eye, and community morale improved. The initiative was quickly shut down once high-level politicians learned about it. This unfortunate scenario repeats itself in real life over and over again, even today.

Edited published version here.

The current anti-Russia sanctions, instead of solely draining the country’s authoritarian institutions, hurt these institutions’ democratic alternatives even more. As a result, after inevitably losing the war with Ukraine, Russia will become a poorer, more authoritarian, and hostile society united by an even stronger desire for retribution. To avert this outcome, there should be an acknowledgment that Russia’s autocracy is upheld solely by unreformed Soviet institutions. I argue that the theories of economic transitions that guided the creation of the Russian modern private sector provide clear theoretical guidance on optimal sanctioning today. Russia’s state higher education and science is an excellent frontier where these optimal sanctions can be tested.

Countries are not humans

Oddly, international sanctions that cost trillions to the global economy are not guided by a coherent theory or solid empirical regularities. Existing policies implicitly borrow from the criminological theories of incapacitation and deterrence. The idea of incapacitation is as simple as it is old – isolate the offender from society to prevent future offending. Thus, the focus is on halting foreign currency inflow to Russia, including banning Russian export. This erodes Russian governmental global purchasing power and prevents future malicious activity.

Incapacitation is the most expensive and the least effective approach in criminology. The isolation prevents offenders from being productive workers and adversely affects those who depend on them. But most importantly, a country, unlike a human, can never be completely incapacitated. The West may stop buying gas from Russia in the future, but then the East will happily accept the same amount at a discount.

Alternatively, deterrence aims to discourage offences by instilling fear of consequences. A recession might scare a democratic politician who worries about winning a fair election. Russia never had fair elections. The economic sanctions are not scary to Putin and do not exert deterrence. Beyond that, the success of sanctioning is predicated on rationality – an ability to understand tradeoffs. Contrary to that, Putin’s capacity for rational thinking is an activity area of debate.

For Russians, the recession of the 1990s, when the economy underwent an unprecedented structural transformation, is an important benchmark. At the beginning of the transformation, the economy lost 52% of its output. By comparison, during the Great Depression, a textbook example of economic collapse, the American economy declined only by 34%

Many Russia’s rulers of today have been governing since that period. Thus, their tolerance for economic calamities is unimaginably high. The inconsequential sanctions of 2014 only reinforced their confidence that the recovery will inevitably follow once the economy adjusts. In particular, soon after the first 2022 sanctions were implemented, Putin’s government expressed confidence that the economy would recover after a temporary increase in inflation and unemployment.

Sanctions not only do not deter Putin, they feed him. Putin legitimizes his rule by heroically withstanding the economic hardships caused by the West “to put Russia to its knee.” This is not a rhetorical device but literally the message propagandized by Kremlin’s information monopolists. This message conveniently resonates with the Kremlin’s obsession with WWII.

Most Russians have been brainwashed into seeing the Nazi atrocities on the Eastern front, the painful economic transformation of the 1990s (which is also blamed on Americans), and the current economic sanction as a single narrative where Putin is the hero fighting the hoards of enemies inside and outside the country.

All in all, applying criminological thinking of deterrence or incapacitation to countries is incorrect. Even thoroughly personified dictatorships like Putin’s Russia are not humans. The largest drawback of equating a country and a human is the collective blame lazily assigned to all Russians. This is particularly unusual in the age of Black Lives Matter.

A randomly chosen African American is much more likely to be convicted of a criminal offense than anyone else. However, the world is finally waking up to the fact that this outcome results from slavery and system racism. Similarly, Russia’s problem is not its culture or preferences for violence. Russians are firstly the victims of unjust institutions and then the perpetrators.

Sanctions to finish the reforms

The best theoretical guide for optimal sanctioning is provided by the forgotten theory of economic transitions. In the 1990s, setting the economic agents free of deleterious state control was at the core of understanding the transition. The economic resources captured by the inefficient state companies generate well-being if resources are encouraged to relocate into newly created private enterprises.

This thinking motivated the Russian reformers of the 1990s to set prices, capital, and trade free. As a result, after 70 years of nonmarket resource allocation that ruined the Soviet economy, the newly established private sector became a domain of freedom and prosperity never seen in Russia. This, in turn, created a demand for political freedoms. The anti-Putin protest uniquely consisted of educated private-sector workers.

The reforms stopped soon after Putin came to power. His authoritarian rule today hinges solely on unreformed Soviet institutions. These institutions are the world’s enemies. Putinism can only be defeated if sanctions assist in transforming them. Similar to the private sector reform of the 1990s, this can be achieved by releasing resources used in these institutions towards better ones. The sanctions must be targeted to this effect.

Unfortunately, the current sanctions are not designed with this objective in mind. Consider these four examples.

Closing Russian YouTube state channels is an excellent idea, but it is counterproductive to ban all Russians from making money with their channels. After Putin shut down all non-state media, Russians poured into YouTube seeking the information.

The alternative media is the only way to fight the propaganda, and a sensible policy should encourage independent voices. Banning the state propaganda channels is proof that YouTube can identify malicious propaganda and selectively disable it; thus, there was no reason to ban all Russian residents from monetization. The channel’s attitude toward the ongoing war makes this distinction today easier than ever before.

Sanctioning state banks is good because it transfers resources toward entities where the state’s capacity is reduced. Russian state banks are the main sources of corrupt income for Putin’s loyalists. On the contrary, banning all Russians from using their bank cards abroad gives Putin a favor. After Putin attacked Ukraine, 200,000 mostly IT specialists left Russia, causing a panic in the government. Most of them had to return and work to sustain Putin’s regime further because they could not use their funds outside Russia.

Sanctioning the Russian state’s foreign currency reserves is a great idea. It drains the mobster’s ability to reward his abettors with foreign goods that Russians (due to their inability to produce them) value so much. However, buying natural resources from the Russian state companies is counterproductive.

Indeed the purchasing of gas by the European countries has been the single most significant contributor to the maturity of the institutions that support Putin’s illegitimate rule. In addition, these same countries were selling Putin military hardware, against their own post-Crimea 2014 embargo, based on his promise that it won’t be used for military purposes.

One of the anticipated effects of the sanctions was that Putin’s adversely affected social circles would talk him out of war. Only a democratic politician that projects his own life experience could have thought of that. Putin never felt pressure from his constituents (this notion has no place in Russian politics) and spent most of his years in power trying to reduce the influence of oligarchs on politics.

The elites’ support for Putin has only increased after sanctions were imposed. This happens because the collective tribal blame implied by the current sanction regime causes an indiscriminate reduction in Russians’ economic well-being.

Leveraging institutions that Putin can not ban

There is no doubt that Russia will lose the war, but it won’t change the Russian regime unless Soviet totalitarian institutions are still in place. So far, we have seen no evidence that their relative power in society is changing in favor of alternatives. Quite the opposite, many keen observers point out that Russia’s totalitarian feature will worsen and persist long-term. Russia will likely become more aggressive and dangerous too.

Unfortunately, not much can be done at this point. Elections, media, the justice system, everything that conventionally balances autocrats either never existed in Russia or has been emasculated by Putin’s gang. There is, however, one potential avenue for change. Russia’s higher education and science have untapped potential, but only if sanctions, as discussed above, are designed as a clever coordination device to transfer resources away from state-captured institutions toward better ones.

Of all determinants of Russia’s illegitimate power hierarchy, education has a unique property. On the one hand, Russian education is relatively globally integrated; therefore, in the short run, responsive to external impacts. On the other, it may revert the existing power ranking in society. For example, the Russian Academy of Science has historically been a prominent critic of the Russian authoritarian government. It took six long years for Putin to dismantle the Academy. Today the Academy undoubtedly would have been a powerful anti-war voice.

The Russian government harshly regulates state-owned education and uses it as a tool of propaganda and coercion. The deans of nearly all Russian state universities signed the letter supporting the war. Students who protest the war are expelled, while academics who do not support the war are discriminated against. It is also common to see pseudo-historians and conspirologists as faculty members who propagate a warped version of Russian history that justifies violence toward various minorities, ex-Soviet republics, and political opponents.

The opposite is happening in Russian private establishments. Importantly these establishments still have authority within a society, and the public does not eschew them for being “unpatriotic.” Unlike their politicians, Russians do respect and trust their scientists. After all, private establishments like European University at St Petersburg, New Economic School, and the Moscow School for the Social and Economic Sciences are at the top of their fields.

Harsh coordinated sanctions against the Russian state establishments with simultaneous support for private institutions will encourage resource transfer toward the private entities, opposing Putin. Importantly, supporting the private sector is as crucial as sanctioning the state one.

In line with theories of economic transition, the goal is not pain for its own sake but the encouragement of resource transfer. This suggestion is not without an empirical basis. The causal empirical link between better (read free of the authoritarian state capture) education and democracy is well established.

My conclusions may upset some Russian researchers working for the state universities – no need for this. Soon after Russia started the attack on Ukraine, the Russian government banned every media it did not own. Soon after, the same reporters opened their communication channel and now have, as before the ban, an audience of dozens of millions.

The demand for education will never disappear. Even if the government takes a license away from the private universities – the worst outcome – the private universities can still issue certificates. The certificate will still be in demand from the students if the business votes for them by offering better jobs and higher pay.

Unfortunately, on this front, as of now, the world is favoring Putin. The keynote lectures of prominent scientists are being canceled because of their affiliation with a private institute whose leadership publicly condemns the war, risking theirs and their familiar lives and economic well-being. Measures like this are optimal only if the object is to have Putin and his future copycat in power forever.

Consistency

There is another reason why Russian state educational establishments should be a part of sanctions. The education sector is a critical factor during the economy’s transformational adjustments. A rapid change in the availability of technologies requires the education sector to retrain the labor for optimal capital-labor complementarity. For example, computers (or steam or electric engines) are useless if workers don’t know how to use them. This logic extends to organizational technologies too.

My recent paper shows that the Russian transition of the 1990s is a special case of adjustment to new organizational technologies. At the beginning of the transformation, the recession was so strong because the economy lacked personnel (law and business graduates) able to navigate the market environment. The recovery began only after the economy was saturated with properly trained human capital.

The sanctions also change the technologies available to the economy; thus, a change in the labor market will follow. After the education sector optimizes the skill available in the labor market, the economy’s recovery follows. Understanding this, the Russian government declared the Decade of Science and Technology straight after the sanctions were imposed.

Therefore, excluding education from sanctioning is an inconsistent approach because Putin is certain that the recovery, however distant, will follow. Including education, on the other hand, may enable some deterrent effect of the current sanctions. Although, as argued above, to be a credible threat, the economic sanctions should induce a recession larger than the transformation recession of the 1990s without a prospect for recovery. I don’t think sanctions can achieve this, but they can encourage resource transfer toward those willing to resist Putin inside the country. The combined forces might work.

An edited version is published here

Would you and your mates cancel a celebration if the price of your usual drink went up while the prices of other alcoholic beverages remained the same? Most likely, no. Paradoxically, the current system of regulation is predicated on the assumption that you would. Tax is the main means by which the Australian Government tries to influence alcohol consumption. Australia, however, has four different tax regimes and two different modes of taxation. Beer is subject to eight different excise rates, and brandy is taxed differently from other spirits, while wine has its own special tax arrangements. As a result, there is no effective policy tool; instead, policymakers have to engage multiple diverse artificial and politically expensive processes to regulate one product.

Alcohol abuse imposes an enormous health burden on the community. The acute burden of abuse is felt mainly by the young, a disproportionate number of whom are killed through accident and misadventure. Getting alcohol policy right means getting the system of taxation right. While the complexity of the Australian system of taxation of alcohol has been criticized for decades, our new study shows that our tax system is incapable of delivering an effective policy response to the problem of alcohol use by young people.

During 2008 and 2009, in response to a growing concern that ready-to-drink (RTD) beverages were encouraging a culture of binge drinking by adolescents, the Australian Government increased the tax on RTDs by 70% to specifically target adolescent drinking. Our new study showed this massive tax did not affect alcohol consumption of those under 25 years old (the tax targeted age group). Instead, the tax reduced drinking among those aged 25 – 69, reducing their average daily consumption of standard drinks by 8.9% from 2010 to 2018.

We argue that the age group under 25 did not respond to the tax because young people have no problem switching to a different product if their preferred drink increases in price. The alcohol industry anticipated the switch and provided further price and marketing encouragement for it. We also show that the 29% wine equalization tax rebate of 2004 actually increased drinking among those under 25. The rebate was effectively a subsidy, propping up the production of cheap wines.

These observations show that the drinking of young Australians is sensitive to the presence of the cheapest drinking options. Therefore alcohol tax policy should avoid focusing on particular types of beverages. A better approach would be to introduce a floor price on alcohol per standard drink or replace the current taxation system on alcohol with a uniform volumetric tax per standard drink, applied across all alcohol products, as recently pioneered by the Northern Territory.

The innovation of our study is that, unlike previous studies, which compared alcohol consumption before and after the RTD tax, we employ quasi-experimental techniques that allow us to separate the effect of the tax on different age groups. We also use individual-level data from the Household Income and Labor Dynamics in Australia survey rather than aggregate-level data. The basic logic of our estimation approach is clarified in the figure below.

The figure shows the Australian national annual drinking trends with population broken into three age groups. The age group above 70 (blue line) was unaffected by the RTD tax. We use it as a comparison group. The effect of the RTD tax on the age groups 25 – 69 (red line) is easily distinguishable. The time trend for this age group goes up, right before the tax increase, and then goes down. Drinking by the age group 15 – 25 (green line) generally follows a downward trend.

The first arrow points to a visible rise in adolescent drinking in 2005 – the consequence of the 29% wine equalization tax rebate of 2004. The second arrow points to an area where the RTD tax should have had an effect. The downward trend continues without any change, showing no impact on drinking. The general downward trend is in line with other studies that show a global reduction in drinking among young people. Therefore, an approach that compares young people drinking before and after the tax gives the erroneous impression that the RTD tax reduced drinking by young people.

In introducing the RTD tax, the Australian Government was obviously concerned about protecting young Australians. We hope that our findings persuade the Australian Government to take a more sophisticated and effective approach to alcohol taxation. The current taxation system benefits political lobbyists at the expense of the public health of Australians.

An edited version is published here

COVID-19 has resulted in an up to 15% increase in property prices in Australia, further exacerbating the Australian housing affordability crisis and locking millions of Australians into the rental trap. The average Australian knows that paying rent instead of being a home owner puts them in a disadvantaged position. Unlike mortgage payments, which are effectively savings, money wasted on rent will never be used on a family’s education or health. Therefore, the average Australian would be surprised to learn that when researchers and the government quantify Australians’ equality of opportunities, they ignore the fact that some people have to pay rent while others do not.

In this study, I demonstrate the significance of this omission. Using data for Australia, the US, and Germany, he finds that only Australia sees a noticeable reduction in the equality of opportunities after accounting for the fact that some people spend money on rent and others do not. The findings challenge the Australian government’s claimed success of providing citizens with equality of opportunities and show hidden and ignored inequalities.

“Intergenerational income mobility” refers to the degree to which an individual’s position in the income distribution persists or changes from one generation to the next. For example, a society in which an individual’s adult income is altogether independent of their parents’ income is a highly mobile society. A society in which one’s percentile in the income distribution is always identical to one’s parents’ percentile is completely immobile.

In a practical sense, intergenerational income mobility demonstrates how individuals’ economic well-being is determined by a factor they never had a chance to influence: their parents’ economic well-being. Intergenerational income mobility is a measure of equality of opportunities. This measure, similarly to GDP, is routinely calculated for all countries in the world. Ranking of countries by this measure is an occasional source of pride for Australians.

The accepted practice while measuring the extent of mobility is to use disposable income. A rarely mentioned problem with this practice is that using disposable income risks misinterpreting the evolution of standards of living because economic well-being is determined not only by the goods one can buy in the market but also by sources of incomes that are in-kind (such as publicly provided health and education services) and non-monetary (such as imputed rents for owner-occupied accommodation and the consumption of one’s own produce). For that reason, income measures that include in-kind and non-monetary sources of income are conceptually superior.

One component of non-monetary income that has particular quantitative significance is home ownership. One’s home is a financial asset and a source of services that influences standards of living through various psychological and consumption benefits. Since those who do not own their accommodation have to pay rent to access similar services, and the fraction of home owners differ across countries and within countries across time, ignoring these differences can produce time-series and cross-sectional comparability problems. One way to solve these problems is to assign a monetary value to home ownership. This hypothetical income stream is known as imputed rent. The imputed rents are often ignored in microlevel studies because they complicate the analysis.

Consider, for example, two individuals with an annual income of $50,000. One lives in a $2 million house, the other with his/her parents. The first person could have rented their house out for a substantial amount of money, and the rent imputation method would include this hypothetical payment into their income. Conversely, ignoring imputed rents suggests that both individuals are equally well off. Figuratively speaking, homes are legalised “offshore accounts” that allow hiding wealth. Other researchers have shown that this is a common method to access the Australian means-tested government system of benefits, as owner-occupied accommodation is exempted from those tests. This behavior encourages excessive home ownership, exacerbating further the affordability crisis.

My paper is the first to demonstrate that excluding imputed rent might noticeably mute the intergenerational transmission of income for some countries and not others. The imputed rent substantially decreases intergenerational relative income mobility in Australia by 22.03%, whereas the effect on mobility in both the US and Germany is negligible (not statistically different from zero).

The results should be understood in the context of the ongoing Australian housing affordability crisis. The results show that “the Australian dream” of owning a house within city limits competes with the country’s egalitarian aspirations. Actions that reduce imputed rent relative to income would also likely increase intergenerational mobility in Australia. The reasons for currently high imputed rent are likely structural. In Australia, unlike Germany or the United States, higher-paid jobs are spatially concentrated in a few locations, while the urban population density is low.

The Australian example cautions against using only readily available disposable income for international or time-series comparison as this measure does not include home ownership. Australian public policy explicitly aims to ensure that children growing up in the poorest households have the same adult earnings prospects as children from more affluent families. These aims are unachievable without resolving the housing affordability crisis first.

A noticeable increase in housing prices during COVID-19 would, in reality, exacerbate the equality of opportunities further, yet as standard measures of mobility ignore home ownership, this exacerbation will go undetected by both researchers and the Australian government. At the same time, higher-paid workers, those who did not lose their jobs during the lockdowns, and those with access to parental financial help, will concentrate home owners in their hands with a potential to extract rent from less fortunate but no less hard-working Australians.