#8 June 2005 - Melbourne Institute News

Melbourne Institute News June 2005 ISSN:1442-9500 (print)

ISSN 1442-9519 (online)

Print Post Approved PP381667/01204

Issue 8

From the Director Over the first half of this year, all members of the Melbourne Institute have been involved in reviewing our past and in developing the Vision Statement and Strategic Plan for the next five years.

Professor John Freebairn Director

Sustaining Prosperity An overview of Sustaining Prosperity, the third Economic and Social Outlook Conference, run by the Melbourne Institute and The Australian.

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The 2005 Federal Budget Hielke Buddelmeyer, Guyonne Kalb and Lixin Cai give us their evaluation of the 2005 Federal Budget.

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The Welfare Trap Mark Harris and Guyonne Kalb discover that many Australians have become dependent on the welfare system.

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Job Loss the Main Reason for Retirement In a study released by Jeff Borland, it is found that around one-third of older Australian men are retired due to retrenchment, with many finding it nearly impossible to become re-employed.

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Forums and Seminars Find out about recent and upcoming Melbourne Institute forums and seminars.

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In the process, we have benefited from the advice of our Advisory Board and the internal University Academic Audit Report.

I am pleased to report that the last nine years under the astute leadership of Professor Peter Dawkins have been regarded as highly successful. Among other achievements, the Melbourne Institute has increased its staff and revenue manyfold, largely via the successful tendering for and delivery of contract research, with base support from the University and Faculty; actively contributed to policy debates via its publications, public conferences and media contributions; published articles on research in international and Australian journals; and provided a supportive and enjoyable workplace in which each and every member is valued. I congratulate and thank Peter for his leadership and join with all his colleagues in wishing him well in his new position of Assistant Secretary in the Victorian Department of Treasury and Finance.

The Vision Statement and Strategic Plan for the future involves building on existing strengths, nurturing some new developments, and keeping an eye for new opportunities. Continuing projects include the HILDA Survey, labour economics and social policy analysis, macroeconomic forecasting and analysis, and microeconomic analyses. In these and new initiatives we aim to build up the Australian and international intellectual reputation of the Melbourne Institute through publications, collaborative crosscountry studies and an increase in PhD students. One area of initiative already started is in the area of health economics, an area strengthened by the appointment of Professor Tony Scott (profile on back page).

www.melbourneinstitute.com Melbourne Institute of Applied Economic and Social Research - Page 1

Sustaining Prosperity On 30 March and 1 April 2005, business, political and academic leaders and thinkers gathered at the University of Melbourne to consider major economic and social challenges facing Australia in 2005 and beyond.

They participated in the third Economic and Social Outlook Conference—Sustaining Prosperity: New Reform Opportunities for Australia—presented by the Melbourne Institute of Applied Economic and Social Research and The Australian.

This was the third conference since 2002 in a series of influential economic and social outlook conferences with an important focus on the reform agenda. They have become recognised as Australia’s most important policy conferences.

The thrust of the two previous conferences and associated books was not contested. But a major new concern emerged. Is the economy on as strong a footing? Have we been suffering from a serious problem of reform fatigue over the last few years that has threatened continuing prosperity? Are there serious bottlenecks in the economy, which mean that we will have to slow the economy for a period? And after a period of slower growth will we be in position to return to stronger growth before long, or is the supply side of the economy not going to be responsive because of the lack of a reform program?

In an article in The Australian, the Editor-at-Large, Paul Kelly, highlighted the evidence that Ann Harding presented to the conference, which suggests that the Howard Government has continued the tradition of using taxation revenue and the social security system to redistribute income from the rich to the poor. Thus it has shown commitment to an egalitarian redistributive role for government and disbursing much of the fiscal dividend from economic growth to low-income families.

Questions are arising, however, about whether it has been as committed to an economic reform agenda to achieve a sustained prosperity.

been going long enough now to begin to provide some insights into how persistent such things as poverty and jobless households are. More than half of those in poverty in one year move out of poverty the next year. Tony Nicholson of the Brotherhood of St Laurence also spoke in this session, arguing for a new social policy for the new economy.

The economic debate was cental to what followed. Will Australia’s outstanding productivity performance of the 1990s continue? Should flat export growth ring alarm bells? How big is the ageing threat? What is the answer to reform fatigue?

Treasury Secretary Ken Henry focused on Australia’s international engagement and reform. He emphasised the ongoing importance of international engagement as part of the domestic reform agenda. Gary Banks, Chairman of the Productivity Commission, focused on the policy implications of an ageing population.

In the area of industrial relations, tax and welfare reform, Michael Chaney of Wesfarmers and the Business Council of Australia argued strongly for further industrial relations reform. One of his arguments, based on advice from Chris Richardson of Access Economics, another speaker at the conference, is that the industrial relations system does not provide an effective way to achieve equity objectives. If you want to increase the incomes of the low-wage earners in low-income families, the tax-transfer system provides better instruments. Greg Combet supports the use of the tax-transfer system to achieve equity objectives but argues that higher minimum wages should also be pursued.

On moving people from welfare to work, the Treasurer, Peter Costello, used the conference to espouse the case for imposing obligations on lone parents to seek employment, in return for receiving income support. In addition to the Treasurer, the Minister for Workforce Participation, Peter Dutton, provided an overview of the Government’s approach to welfare reform.

In the first session of the conference, the wellbeing of Australians was explored. How prosperous have we become? Is inequality rising or falling? What about the homeless and marginalised? Mark Wooden presented evidence from the Household, Income and Labour Dynamics in Australia (HILDA) Survey, to complement Ann Harding’s evidence, with a particular emphasis on the longitudinal nature of the HILDA data. The survey has

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Others at the conference, for example three of “the five economists” (Ross Garnaut, Chris Richardson and Peter Dawkins), and the Shadow Treasurer, Wayne Swan, did not contest the idea of increasing obligations on welfare recipients, but argued strongly that the financial incentive to work should also be raised.

John Freebairn joined Malcolm Turnbull in arguing for tax reform with a particular focus on broadening the income tax base and using the revenue gained to fund lower tax rates.

Kim Beazley took the opportunity of the conference to offer the ALP as the party of reform in the tradition of the Hawke-Keating governments of the 1980s.

Federal-State relations was an important theme of the conference. Victorian Treasurer, John Brumby, made a strong plea for a broad reform agenda to increase productivity and participation, requiring Commonwealth and State Governments to cooperate.

David Crawford, the Acting President of the National Competition Council, argued for a continuing focus on national competition policy, and regretted the Commonwealth Government’s announcement that it will cease to make competition payment to the states if they generated reforms in the national interest. Rod Sims presented an overview of his analysis (undertaken for the Business Council of Australia) of the deficiency of investment in infrastructure as well as reforms needed to improve the efficiency of Australia’s infrastructure.

Since the October 2004 Federal election there has been growing doubt about the sustainability of the Australian economic success story and growing calls for more urgency in an economic reform agenda. This reached a crescendo at the Sustaining Prosperity Conference. It is incumbent upon Commonwealth and State Governments to take these calls seriously.

In the tradition of the Economic and Social Outlook Conferences, the importance of using economic success for social progress must also be emphasised. This is one of the reasons why welfare reform and education reform, for example, need to be two of the important ingredients of the reform program, along with infrastructure, tax and industrial relations reform.

This article is an edited excerpt written by Peter Dawkins and Michael Stutchbury from the book Sustaining Prosperity, which includes papers from the Sustaining Prosperity Conference.

Opposite page: Peter Costello. This page, from top: Kim Beazley, Jackie Huggins, Jeff Borland, Jenny Macklin. Photo Credit: Les O’Rourke.

To obtain a copy of this limited edition book, Sustaining Prosperity, please contact Duane Barron on 03 8344 2100 or dbarron@unimelb.edu.au.

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Evaluation of the 2005 Federal Budget Drs Hielke Buddelmeyer, Lixin Cai and Guyonne Kalb of the Melbourne Institute examine the 2005 Federal Budget with regard to labour supply responses.

The second year’s changes are most beneficial to partnered men and single parents and to a lesser extent to single women. However, these changes to be introduced on 1 July 2006 are not expected to affect single men and for partnered women an adverse effect is calculated. This effect for partnered women is a common result when reducing benefit withdrawal rates.

This year’s Federal Budget was clearly aimed at improving Australia’s labour force participation. Several measures were introduced to provide incentives for people to work.

First of all there are a range of financial incentives making the rewards to work greater for nearly everyone, such as the reduction of the lowest tax rate from 17% to 15% and the increase of the highest income threshold to $95,000 per year (instead of the originally planned $80,000 in last year’s budget) in 2005–06, which is going to be further increased to $125,000 in 2006–07 in addition to increasing the $63,000 threshold to $70,000. Further measures in 2006–07 benefiting lower income groups who are dependent on income support include the reduction of the benefit withdrawal rate of 70% to 60% for income over $250 per fortnight and to 50% for income between $142 and $250 per fortnight. Finally, for families the minimum rate of Family Tax Benefit Part A starts to be reduced at an annual household income of $37,500 instead of $32,485.

The Melbourne Institute of Applied Economic and Social Research at the University of Melbourne has calculated the expected effect on labour supply of these changes.

The Federal Budget also proposes to spend additional money on services such as education and training programs, wage subsidies, rehabilitation, the Workplace Modification Scheme, and additional childcare places.

Although no formal calculations have been carried out to assess the effect of these changes, they are expected to reinforce the positive labour supply effect resulting from the financial incentives described above.

The expected effect of the changes to be introduced on 1 July 2005 is to increase labour supply by about 40,000 persons, with an additional 10,000 expected to result from the changes taking effect on 1 July 2006. This indicates that the change of tax rates for lower income individuals is more effective with regard to improving labour force participation than changes higher up the income range.

The effect of transferring single parents with children over 6 and disabled persons with a work capacity of 15 hours or more from a pension payment to the Enhanced New Start Allowance with a part-time work obligation and imposing a part-time work obligation is not formally calculated. The effect on labour supply of these measures is ambiguous.

As a result of this transfer, relatively less can be gained from employment due to the higher benefit withdrawal rates when earning additional income. This is of course (partly) counteracted by the requirement to look for work to remain eligible. The short-term effects are further complicated by keeping the old systems in place for current recipients. There is a clear incentive for single parents and disabled persons to remain on the old system, which may have adverse short-term effects on the probability of these two groups to re-enter the labour force. However, given the relatively small number in these two groups, for the working-age population overall, a moderate additional positive effect on employment is to be expected from the latest Federal Budget.

Expected Number of Additional Workers Due to the Financial Incentives in the 2005 Federal Budget Couple men

Couple women

Single men

Single women

Effect of changes implemented in 2005–06

7,900

10,100

9,300

6,300

8,000

41,600

Combined effect of changes implemented in 2005–06 and 2006–07

15,000

7,000

9,600

7,600

12,900

52,100

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Single parents

Total

The Welfare Trap Australians on disability and sole parent payments are showing a long-term dependency on the welfare system, according to a report released by the Melbourne Institute.

The report, by Dr Mark Harris and Dr Guyonne Kalb entitled ‘Movement between Benefit Types’, examines the transitions between seven groups of income support payment types. The payment type categories are unemployment payments, sole parent payments, partner and parenting payments, disability and sickness payments, age pension payments, and other payments. In addition, we observe when individuals no longer receive payments.

The report showed that Australians receiving disability payments record the longest durations on payments and are least likely to move off these payments. Those who receive sole parent payments register as the second highest in duration, according to the report.

The report further found that a relatively large proportion of the sole parent payment group transferred to an unemployment payment when their eligibility for Parenting Payment Single ended. It also indicated that the dependence on income support by sole parents is even more long term than first thought.

Dr Kalb, of the Melbourne Institute, said: ‘The long-term nature of the disability payment is illustrated most clearly in that, instead of moving out of payments altogether, the most common destination for this group is to go straight

onto another payment—the Age Pension.’ The authors discovered that disability-related payments have a yearly retention rate of about 90 per cent, whereas people on unemployment-related payments have a probability of around 55 per cent of still being on these payments after one year.

Although sole parent and disability payment recipients are the least likely to move off benefits, this research also shows that cyclical fluctuations affect the inflow rate into unemployment but not so much the exit rate of those already in unemployment. This indicates that fewer people enter unemployment in an economic upturn rather than a larger number exiting unemployment. This presents a potential problem with long-term durations for those on unemployment benefits as well.

On a more positive note, recipients of partner and parenting payments are not completely outside the labour force, as is indicated by inflows to and outflows from the category of individuals who do not receive a payment themselves but have a partner who receives a payment.

This indicates that they have moved off payments through an increase in their own income, presumably through employment.

The report also discovered that although women spend more time on income support, mostly through sole parent payment spells and partner and parenting spells, men were more likely to stay on unemployment benefits than women.

The full report is available on the newly upgraded Melbourne Institute website, www.melbourneinstitute.com.

HILDA Survey Research Conference 2005

The second HILDA Survey research conference is to be held at the University of Melbourne on 29–30 September 2005. The aim of the conference is to provide a forum for the discussion of research based on the Household, Income and Labour Dynamics in Australia Survey. Attendance at the conference is open to all persons interested in the HILDA Survey and longitudinal survey research.

A one-day HILDA User Training course will be conducted on Wednesday 28 September 2005.

Registration is now open for the conference and the HILDA User Training course.

Further information about this unique national event, including registration forms and a draft program can be viewed on our website at www.melbourneinstitute.com.

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Poor Job Prospects for Older Aussies Job loss is the main reason for older Australians ceasing work, according to a study at the Melbourne Institute.

The findings, reported in a paper by Professor Jeff Borland (Department of Economics, University of Melbourne), show mature age workers who become unemployed have a relatively low probability of re-employment and therefore spend long periods unemployed.

According to the paper, one major source of unemployment is retrenchment. Although retrenchment is not strongly ordered by age, it is unlikely that mature age workers will be re-employed once they have been retrenched.

Professor Borland said it was ‘very worrying to see such a significant amount of people in the workforce suffering from job loss, especially older people who were less likely to be re-employed.’

males came off the worst with as many as 46.6 per cent ceasing employment through job loss. By comparison, females recorded around 20 per cent.

For those people who do manage to change jobs, evidence suggests that they will experience large wage losses, with the hourly wage rates of older workers changing jobs decreasing by approximately 30 per cent—a staggering amount.

Professor Borland also found through his study that for people aged 55 years and over, the employment rate remained around eight percentage points lower in 2003 than it was in the 1960s.

Although the decline in participation and employment rates was most pronounced for men between the ages of 55 and 64, a general decline for men occurred through all age groups.

Professor Borland said he found it of ‘great concern that people who are able to find a new job can expect such hefty decreases in their wages’, adding that ‘older employees have experience and many other great attributes to offer which employers should be considering more closely.’

The paper, entitled ‘Transitions to Retirement: A Review’, is available at www.melbourneinstitute.com.

In 1997, about one-third of retirees listed ‘job loss’ as their main reason for ceasing their last full-time job. By gender,

Australian Economic Review The Australian Economic Review, published quarterly, is an applied economics journal with a strong policy orientation.

The Review aims to publish high quality articles applying economic analysis to a wide range of macroeconomic and microeconomic topics relevant to both economic and social policy issues. It is of special interest to Australian academics, students, policy makers, and others interested in the Australian economy. It also deals with matters of international interest.

The June edition of the Australian Economic Review includes a policy forum on workplace relations reform. The Editor of this policy forum, Professor Mark Wooden, says the Howard Government agenda is all about ‘the small business agenda’. In his introductory piece, Professor Wooden focuses on unfair dismissal laws and other measures to assist small business; independent contractors legislation; minimum wage setting; and a single unified national system. The journal includes contributed articles, a ‘For the Student’ article and a ‘Data Surveys’ article.

To subscribe to the Australian Economic Review, please contact Blackwell Publishing Asia on (613) 8359 1011 or by email at subs@blackwellpublishingasia.com.

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Forums and Seminars Seminar Series

Public Economics Forum

The effects of increased access to infertility treatment on infant health outcomes was a topic discussed at our regular seminar series.

In the lead up to the 2005 Federal Budget, the Melbourne Institute’s longrunning Public Economics Forum explored the economic outlook and the economic reform agenda.

Dr Marianne Bitler, from the Public Policy Institute of California, USA, provided evidence from state insurance mandates regarding her findings.

Dr Bitler said that reproductive technologies have radically improved since the introduction of the first fertility drugs in the late 1960s. These technologies make conception possible for many couples who otherwise would be unable to reproduce. Many of these technologies increase the probability of having a multiple birth, typically a more risky pregnancy, and also provide women considering delaying reproduction with insurance against later infertility.

Live births resulting from the use of advanced reproductive technologies and other infertility treatments are a tiny share of all births (around 0.5% of all births in 1999 in the United States were due to the use of advanced reproductive technologies), making it difficult to detect impacts of these technologies. The main results are for a sample where births related to advanced reproductive technologies are much more common, namely twin births (about 6% of US twin births in 1999 were the product of in vitro fertilisation and other advanced reproductive technologies). This paper examines the association between the dissemination of advanced reproductive technologies and other infertility treatments on birth outcomes for live twin births during 1981–1999, using variation in access to technologies induced by state-level insurance mandates forcing insurers to cover or offer to cover use of infertility treatments, thus subsidising the use of these treatments.

Evidence was found that these insurance mandates have a measurable impact. Subsidised infertility treatment for older mothers is associated with a statistically significant 15% increase in the probability of having a twin, typically a more dangerous pregnancy. Subsidised infertility treatment is also associated with small but statistically significant negative effects on gestation, birth weight, and the 5minute Apgar score.

These effects suggest that the effects of investment by these mothers are outweighed by impacts of either the infertility treatments themselves or by the selection into pregnancy of women of low fecundity.

The forum, chaired by Dr Ken Henry, Secretary to the Treasury, was held on Tuesday 26 April at the Hyatt Hotel in Canberra. It attracted over 120 attendees and wide media coverage.

Dr Mark Crosby, of the Melbourne Institute, discussed economic forecasts while Dr Chris Richardson compared the Melbourne Institute’s forecasts with those from Access Economics and commented on the reform agenda.

The Melbourne Institute’s new director, Professor John Freebairn, presented his analysis of the medium- and longterm outlooks, and the economic reform agenda. As part of his presentation, Professor Freebairn suggested that human capital was critical both to economic growth and to greater equality of opportunity. In particular, he argued for substantial extra investment and changes in education methods at the primary and secondary school levels to increase the achievement rates for all students.

More information on the Public Economics Forum, including presentations, can be found on our website, www.melbourneinstitute.com.

Upcoming Forums The Melbourne Institute Forums aim to provide members with access to authoritative and independent economic research and analysis. Through this, the Melbourne Institute endeavours to provide practical, first class support for business, government and the community.

Workforce participation will be the theme of the next two forums to be held as follows: Business Economics Forum Wednesday 6 July, 7.30am–9.00am Carillon Room, Hotel Sofitel Public Economics Forum Wednesday 29 June, 12.00pm–1.45pm Hyatt Hotel Canberra

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Recent Melbourne Institute Publications Working Papers May 2005, ‘Patent Application Outcomes across the Trilateral Patent Offices’, 05/05, Paul H. Jensen, Alfons Palangkaraya and Elizabeth Webster.

April 2005, ‘The Effects on Firm Profits of the Stock of Intellectual Property Rights’, 04/05, William E. Griffiths, Paul H. Jensen and Elizabeth Webster.

March 2005, ‘Transitions to Retirement: A Review’, 03/05, Jeff Borland.

Reports April 2005, Movement between Benefit Types, Melbourne Institute Report No. 5, Mark N. Harris and Guyonne Kalb.

Leading Health Economist Appointed to the Melbourne Institute Professor Tony Scott has been appointed as a Professorial Fellow at the Melbourne Institute. Tony is a health economist and leads the Institute’s research into the economics of health care. Previously, Tony has worked at the Universities of Aberdeen, Newcastle, Sydney and York. He has a PhD in economics from the University of Aberdeen. Tony is also an Honorary Professor in the Health Economics Research Unit at the University of Aberdeen.

Tony’s research interests have focused on the economics of general practice and primary care, incentives for health care providers, and the labour markets of health care professionals.

He has published extensively in a range of leading health economics and health care journals and has also authored a chapter in the Handbook of Health Economics and co-edited Advances in Health Economics. Tony has also been involved in advising the English and Scottish Health Departments on resource allocation, new contracts for GPs, and health care workforce issues. Tony will build up research at the Institute in the area of financing, incentives and organisation of health services.

Melbourne Institute News Views expressed by the contributors to Melbourne Institute News are not necessarily endorsed or approved by the Melbourne Institute. Neither the Melbourne Institute nor the Editor of Melbourne Institute News accepts any responsibility for the content or accuracy of information contained in this publication. Editor: Laura A’Bell, tel: 8344 2154, fax: 8344 2111, email: labell@unimelb.edu.au. Sub-Editor: Nellie Lentini.

Contributors: Dr Marianne Bitler, Professor Jeff Borland, Dr Hielke Buddelmeyer, Dr Lixin Cai, Professor Peter Dawkins, Professor John Freebairn, Dr Mark Harris, Dr Guyonne Kalb, Mr Michael Stutchbury, Professor Mark Wooden.

Level 7, Alan Gilbert Building, The University of Melbourne P: (613) 8344 2100 F: (613) 8344 2111 www.melbourneinstitute.com