Depending on the service they used and how it was lodged (if it was), it could also mean Australia Post haven't scanned it. For example, if I create a parcel label via Click & Send, I get the tracking number straight away, which - because my eBay and C&S accounts are linked - also then automatically uploads to eBay and marks the item as sent.
AP's tracking will show that as initiated until the parcel is scanned. That will happen if I lodge it over the counter at a post office, but if I drop it in a red street box, the status will usually remain as 'initiated' until the day of delivery, which is the only time (other than lodgement over the counter), my C&S parcels seem to get scanned, but even then there's no guarantee it will be.
An item will remain as initiated for as long as AP will show tracking for it (60 days, I think) if the seller doesn't actually post the item after creating the label, or it is never scanned for one reason or another.
That being said, the seller's lack of response isn't exactly confidence-inspiring, and given that it's been nearly 3 weeks, even if the package was travelling to/from areas that often mean longer delivery times (eg Tas, WA, regional areas), on average a parcel would generally have arrived in that time.
In so far as the PayPal claim goes, the seller needs to provide proof of postage - that means proving the article was posted to you, and is at least in the mail system, either with a scan event (not including initiated), or a stamped lodgement form - if they can't do that, the claim will most likely close in your favour (I say most likely because for obvious reasons I can't guarantee it - PP do get it wrong sometimes, and if by any chance the "initiated" tracking is provided or accepted as proof of postage, you will probably have to phone PayPal to explain that the tracking doesn't actually indicate an item was posted).
