#16 June 2007 - Melbourne Institute News

Melbourne Institute News June 2007 ISSN 1442-9500 (print)

ISSN 1442-9519 (online)

Print Post Approved PP381667/01204

Issue 16

New Director to Start in August We are delighted to announce that Stephen Sedgwick is to be the next Director of the Melbourne Institute.

Professor Sedgwick will commence his five-year appointment from 1 August 2007.

Professor Stephen Sedgwick, Director of the Melbourne Institute (commencing August 1, 2007)

Taking Stock of Innovation Measurement Drs Paul Jensen and Elizabeth Webster discuss the new IBM-Melbourne Institute Innovation Index of Australia, released last month.

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Welfare to Work Dr Rosanna Scutella provides an overview of a new joint project between the Melbourne Institute and the Brotherhood of St Laurence.

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Importance of Childcare for Female Labour Supply Dr Guyonne Kalb discusses the importance of childcare and provides some useful information from an array of recent papers written by herself and with others at the Melbourne Institute.

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A former Secretary of the Department of Education, Science and Training, Professor Sedgwick has had a wide range of experience in the Australian public service. Other previous posts include Secretary of the Department of Employment, Education, Training and Youth Affairs, Secretary of the Department of Finance and senior positions with the Department of the Prime Minister and Cabinet.

In 2002, he was appointed to the Board of the Asian Development Bank (ADB) in Manila where he represented a constituency of countries within the ADB, namely: Australia; Azerbaijan; Cambodia; Hong Kong, China; Kiribati; the Federated States of Micronesia; Nauru; Palau; Solomon Islands; and Tuvalu. He also served as Dean of the Board of Directors of the ADB. Publicly announcing the appointment in April, ViceChancellor Professor Glyn Davis said the University was delighted to have attracted a person of Professor Sedgwick’s background and extensive experience as Director of its widely-respected Melbourne Institute.

“His knowledge and understanding of the major economic and social issues in our region will help to expand the international dimension of the Melbourne Institute’s research.”

Dean of the Faculty, Professor Margaret Abernethy, says Professor Sedgwick will provide strong leadership in the Institute. “He will strengthen the Institute’s research reputation and will build further links with government and industry.”

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New Director Appointed

Miegunyah Public Lecture

Professor Sedgwick said he is pleased with his new appointment.

‘A Comparative View of Unions, Involvement and Productivity’ is a free public lecture to be delivered by Prof John Heywood, University of Wisconsin-Milwaukee.

“The Melbourne Institute has a well justified reputation for high quality applied research that is relevant to contemporary public policy making.

By reviewing his work and others, Heywood will argue that performance pay is more likely to be successful (generating both earning and productivity gains) when workers are involved in its creation and enforcement.

“Having spent so much of my life pursuing good public policy I am very much looking forward to working with the team at the Melbourne Institute to build on this reputation over the years ahead. I hope to consult widely within the University and the community to ensure that our research is well targeted”, he said.

Professor John S. Heywood stands among the first rank of scholars studying the economics and industrial relations.

This free public lecture will be held at 6.30 pm on Wednesday 1 August 2007 at the Prince Phillip Theatre, Architecture Building. Enquiries to the Department of Management and Marketing on (03) 8344 4481 or at miegunyah-lecture@unimelb.edu.au

As well as extensive experience in senior appointments, Professor Sedgwick has a strong academic background, bringing further strength to his appointment at the Melbourne Institute.

He received his B. Ec (Hons) from the University of Sydney and an M. Sc (Economics) from the University of London (LSE).

Light refreshments will be served after the lecture.

Assisting the ASEAN Communities ‘The Development of an ASEAN Community Progress Monitoring System Project’ is a joint project that the Melbourne Institute will be working on along with the ASEAN Secretariat and Celia Reyes.

The project objective is to develop a tool that monitors progress by the ten ASEAN Member Countries towards achieving economic, socio-cultural and strategic targets ratified by recent ASEAN summits. In particular, it will monitor targets committed at the Vientiane Summit 2004

(also known as the Vientiane Action Programme VAP), which were proposed to be achieved by 2010.

The Australian team includes Dr Elizabeth Webster, (Principal Research Fellow, Melbourne Institute), Professor Peter Lloyd, (Professor Emeritus, Department of Economics), and Dr Jong-say Yong (Senior Research Fellow, Melbourne Institute) and Dr Alfons Palangkaraya, (Research Fellow, Melbourne Institute).

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Taking Stock of Innovation Measurement

by Drs Paul Jensen and Elizabeth Webster

Innovation is one of those concepts that everyone embraces with vigor.

Since people can see the tangible effects of innovations, they believe almost without reservation, that being innovative is the most important pathway for individuals, firms and nations to achieve continued prosperity.

Although the issue is far more complex than this conventional wisdom, our concern is with a more fundamental issue: what actually is innovation and how do we measure it? The recent IBM-Melbourne Institute Innovation Index of Australia attempts to tackle this issue head on.

The recent plethora of international innovation scoreboards has highlighted one important thing – we still cannot agree on how to measure innovation. And until we do so, we cannot establish a reasonable benchmark for comparison. This necessitates developing a methodology which captures both the cross-sectional (inter-industry) and inter-temporal dimensions of the rate of change of innovation – something similar to the now wellestablished methodologies associated with measurement of price changes over time (the CPI) or the measurement of national economic output (GDP).

If innovation is so important and so easy to conceptualise, why is it so elusive to measure? There are a number of reasons. Starting from the basic proposition that innovation refers to the introduction of new and improved products and processes, two obvious difficulties arise. First, we have to tackle the issue of what is “new”.

Is it just the launch of new-to-the-world products, such as Sony’s Playstation, or should it also account for imitative products which are new-to-the-firm, such as the Playstation’s rival, Microsoft’s XBox? From an economic perspective, new-to-the-firm innovations are just as important as new-to-the-world innovations since they typically offer consumers greater product choice and cheaper prices. In other words, innovation is as important as invention.

Another complication arises from a secondary characteristic of the definition of innovation; when do we acknowledge that something is an improvement over previous alternatives? At some point in time, an idea may

be turned into an R&D project which may or may not be turned into a new product which is successfully launched onto the market, but which may or may not turn out to capture a market niche. At the heart of the problem is that innovation is highly risky. Of the many projects that start out, only a small proportion will end up as an improved product, process or technique. In this light, innovation is actually akin to a dynamic process rather than something that happens a single point in time. And there isn’t really a clear start and finish to the process.

The final source of difficulty relating to innovation measurement concerns the fact that many innovations are almost impossible for external parties to observe. While many of the more common ways to measure innovation, such as patent applications or R&D expenditure, are easy to observe since they leave an administrative paper trail, many of the more important innovations do not.

Obvious examples here are the many process innovations that firms may prefer to protect through trade secrecy, since this type of appropriation mechanism can, in principle, continue ad infinitum.

In order to address these measurement issues, others have typically either used subjective measures of innovation (survey-based measures) or single-indicator methods of measuring innovation using objective data (R&D expenditure). Both approaches are inherently flawed. As a result, IBM and the Melbourne Institute developed a method for measuring innovation in a broad way without sacrificing objectivity. The result is an index of the rate of change of innovative activity in Australian industry which adopts a multi-indicator approach of innovation measurement and which includes objective data on all forms of intellectual property (patents, trade marks and designs), R&D expenditure and employment, and a survey-based evaluation of organisation and market innovation within Australian businesses. In addition, it includes a measure of labour productivity to capture all of those innovations which we do not otherwise directly observe.

Since all the components of the index are included as intensity measures rather than absolute measures – that is, we include patent applications per person employed, rather than simply the absolute number of patent applications observed in a year – the IBM-Melbourne Institute ‘Innovation Index of Australian Industry’ captures the level of innovative activity over and above any growth in the economy. And it does so across all industries over a 16-year period from 1990 to 2005.

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Taking Stock of the Innovation Measurement (cont’d)

One of the headline observations from the index is that over the entire period of analysis, the rate of change of innovative activity in Australian industry has increased by an average of 1.6 per cent per annum. This result implies that this is growth over and above the observed GDP growth since 1990. Unfortunately, since we don’t actually know what the optimal rate of growth of innovative activity is, it is hard to say whether this is unambiguously a good result or not. However, intuitively we feel that positive growth, within reasonable bounds, is better than a decline.

In the same vein, it is perhaps bad news that in the last year of the study (2005), the rate of innovative activity actually fell by 2.6 per cent. After a period of prolonged growth, our innovative activity has fallen quite some way. Although the index does not purport to analyse the causes of the observed changes, one plausible interpretation of this result is that as the domestic economy has softened in the last couple of years, firms have invested less in risky activities such as innovation.

However, this may be precisely the wrong thing to do.

Please contact Michelle on 03 8344 2100 for a copy of the new IBM-Melbourne Institute Innovation Index of Australia.

New project on welfare to work Melbourne Institute wins new ARC Grant to study long-term joblessness.

Dr Rosanna Scutella, Research Fellow, gives us an overview.

To combat long-term joblessness and increase overall workforce participation the Australian federal government has adopted a ‘work first’ approach to welfare reform over the years. This approach focuses on getting people off government income support and into employment as quickly as possible based on the assumption that even if a job is temporary, the job holder will learn valuable on-thejob skills and their initial job will act as a stepping stone to further employment opportunities.

However, little is known in Australia as to whether the types of jobs that disadvantaged jobseekers are encouraged to enter do actually provide the basis for a ‘successful’ transition into the labour market. At the very least, this ‘successful’ transition would consist of being able to retain employment. Ideally, it would then lead to career advancement and wage progression.

However, there is evidence suggesting that particularly vulnerable groups of jobseekers find it difficult to retain employment and cycle between joblessness and precarious employment.

This new collaborative study between the Melbourne Institute and the Brotherhood of St Laurence seeks to add to the Australian literature on the dynamics of unemployment and low-paid employment by undertaking an analysis of the long-term employment outcomes of particular groups of jobseekers in Australia. The central aim of the study is to identify the factors that assist

with job retention and advancement of the unemployed and other jobless groups that have experienced long spells out of the workforce such as sole parents and people with minor disabilities. This study is particularly significant in that it will identify: whether there is a need for post-employment support for particular groups of disadvantaged jobseekers; the potential for employment, retention and advancement programs to assist these groups; and how broader labour market policies can support sustained employment participation and advancement of low-skilled workers.

The project will use a ‘mixed-methods’ approach. A combination of quantitative and qualitative analyses will be undertaken to examine the direct experiences of selected groups of disadvantaged jobseekers currently receiving employment assistance over the medium to long term. As this sample will be small and not representative of the national population we will also examine a nationally representative dataset to model the relationship between unemployment and low-paid employment in Australia and the UK. The research examining jobseekers’ transitions into employment will therefore comprise of two distinct but interconnected parts. A third part of the research will examine policy options to improve the circumstances of disadvantaged jobseekers once they have re-entered the labour market.

By determining what is required for job retainment and career advancement of disadvantaged jobseekers, the findings of this project will help ensure that future employment policy development in Australia improves employment opportunities for all jobseekers, enabling them to be a part of the mainstream economy and preventing experiences of entrenched poverty and social exclusion.

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Australian Government rewards the HILDA Survey The Australian Government recently announced, as part of the Budget released in early May, that it will provide funding to extend the collection of HILDA Survey data for a further four years. This effectively guarantees the ongoing administration of the survey until end 2012, meaning data users (and other interested parties) can plan on a panel that will be at least 12 years long.

This obviously is fantastic news for the social science research community. There can be little doubt now that the HILDA Survey is well established and has made the transformation into a truly longitudinal data collection.

The Australian Government will provide $20.9m covering the period until 2010/2011, with further funding committed until 2013.

This will ensure that HILDA continues to provide information that helps researchers and government to better understand people’s past and present circumstances to help develop policies and programmes that improve people’s lives.

The Government will benefit from the continuation of HILDA through the useful long-term information it can provide on changing trends in Australian households in respect of employment status and history, current and past incomes, family relationships, health and financial status, housing, education and retirement intentions.

Planning for collection of the ninth year of data will commence in 2008, with the data available for analysts from 2011.

For further information, please visit, http://www.facsia. gov.au/internet/facsinternet.nsf/aboutfacs/budget/ Budget2007-07_wnwd-15.htm.

HILDA Annual Report 2006/07 The HILDA Annual Report for 2006/07 was released in May. Copies are available online at www.melbourneinstitute.com or contact Nicky on 03 8344 2108 for a hard copy.

2007 HILDA Survey Research Conference Conference Dinner

Don’t miss out on attending the 2007 HILDA Survey Research Conference.

The conference dinner is open to all delegates. Guests are also welcome. The cost for the dinner is $75. The dinner will be held at University House at the University of Melbourne.

The 2007 HILDA Survey Research Conference is being held on Thursday 19 and Friday 20 July 2007, at the University of Melbourne.

HILDA Data User Training

The conference includes keynote speakers on topics such as income and poverty, unemployment and parttime employment, gender and the labour market, fertility, ageing issues, marriage, wealth and families.

International speakers include Professor Frank Stafford from the University of Michigan, Professor Richard Burkhauser from Cornell University and Professor Robert Drago from Pennsylvania State University.

Don’t miss out on registering for this event. Please complete the registration form available on our website and fax to 03 8344 2111.

HILDA Data User Training will take place the day before the conference on Wednesday 18 July 2007 in the Alan Gilbert Building at the University of Melbourne.

Registration for the training can be obtained by using the conference registration form. More details regarding the training can be obtained from the HILDA website.

Further Enquiries Please refer to http://www.melbourneinstitute. com/conf/hildaconf2007 for more details or call the Conference Registrations desk on 03 8344 2108.

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Importance of Childcare for Female Labour Supply by Dr Guyonne Kalb No one doubts the importance of childcare in enabling primary carers (still mostly mothers) to participate in the labour force.

Childcare plays a central role in allowing the primary carer time away from young children in the household.

However, empirical analysis based on Australian data is still relatively scarce. Based on data which are representative of the Australian population in 2002, models have been developed at the Melbourne Institute to assess the effect of childcare costs on labour supply.

It is found that the average elasticities of labour supply with regard to the cost of childcare are at the lower end of the range found in the international literature. That is, the effect of an increase in childcare costs on labour supply is, on average, relatively small. Not surprisingly, exceptions are observed for sole parents with preschool children and for sole parents on relatively low wages.

These groups react much more strongly to increases in costs of childcare than other groups.

Once a labour supply and childcare demand model has been estimated, it can be used (in combination with microsimulation) to predict the likely effect of alternative policies with regard to childcare. Such analysis can be useful in providing additional information to assist policy formulation and planning. For example, a recent proposal by the Taskforce on Care Costs to increase childcare subsidies through the provision of increased reimbursements to families for the cost of caring is expected to affect the labour force participation of sole parents and couple families, and the government’s net expenditure. The estimated model can be used to predict the labour supply responses arising from such a policy change.

It was found that replacing the 30 per cent Child Care Tax Rebate (as it was in place before the Federal Budget for 2007/2008) with a 50 per cent reimbursement of childcare costs up to a maximum of $20,000 of childcare costs per family per year and making the subsidy independent of income tax payments, is expected to have substantial labour supply responses. The reforms are

predicted to return just over 50 per cent of the original additional outlay for the increased subsidies through increased income tax and reduced income support payments arising from increased labour supply. This shows that in estimating the cost of policies which are expected to have a substantial effect on labour supply, it is very important to take into account the effect of these labour supply responses on government revenue (which potentially compensates a substantial part of the expenditure). The predicted increase in revenue as a percentage of the original additional cost was found to be particularly high for sole parents, nearly offsetting the original additional expenditure. It appears that carefully constructed childcare subsidy reforms could potentially have a substantial effect on labour force participation at a relatively modest cost to the government.

Aside from the costs or price of childcare there are a number of different aspects to childcare, such as quality, availability and type of service, each of which could affect parental labour supply. These areas all require more study from an economic perspective, particularly in Australia. From overseas studies, childcare rationing (that is, waiting lists for childcare services) and the quality of childcare appear important issues. They are important in themselves and may have a direct effect on childcare demand and labour supply. In addition, not allowing for these factors can potentially affect the perceived effect of childcare fees on demand for childcare and labour supply. It was found that in the presence of rationing the price elasticity seems biased towards zero, due to preferred choices not being available. From the available unit record data in Australia, there is no strong evidence of rationing, but this could be explored further by collecting external information on regions where there are childcare shortages by age group (waiting lists) and regions where there are childcare vacancies by age group. Detailed regional information on formal childcare availability would allow researchers to control for supply side restrictions when analysing the demand for childcare.

This would improve analyses of the effect of the price of childcare on childcare demand and on labour supply.

Another important issue is the link between childcare and child development, conditional on the quality of childcare and a range of other factors. Evidence of

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negative effects from childcare on children’s development could discourage parents from using childcare and as a result it could discourage labour supply. Research into this link and research into what features turn childcare into high-quality childcare are therefore potentially important in designing policies to increase labour force participation. Research in the US has found a distinction between formal and informal childcare in the effect it has on child development, with unpaid informal care in the early years of a child having a negative effect, but formal care in childcare centres potentially having a positive effect. Insight into the effects of different types of care on the development of Australian children is important for current labour force participation but also for future labour force participation. Children should get the best start in life possible to ensure a good future for Australia.

More information on this topic can be found in the following three papers, on which this article is based and which have recently appeared in the Melbourne Institute working paper series.

•

Guyonne Kalb and Wang Lee, Childcare Use and Parents’ Labour Supply in Australia (Working Paper No. 13/07)

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Guyonne Kalb and Wang Lee, The Effect of an Alternative Childcare Subsidy on Labour Supply: A Policy Simulation (Working Paper No. 14/07)

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Guyonne Kalb, Children, Labour Supply and Childcare: Challenges for Empirical Analysis (Working Paper No. 15/07)

Copies of these papers can be downloaded from our website http:// www.melbourneinstitute.com/publications/working/wp2007.cfm.

Working Time and Work Life Balance The next series of Melbourne Institute Economics Forums will focus on working time and the work-life balance.

In a period of unprecedented economic prosperity many Australians are now discovering that the major obstacle to living the lives they desire is no longer a lack of income but a lack of time. In particular, striking the right balance between time spent in paid work and time spent in other activities is proving to be elusive for some.

Melbourne Institute Economics Forum (Melbourne) Thursday 28 June 2007, 12.30 - 2.00 pm Trilogy, Park Hyatt Hotel, 1 Parliament Square off Parliament Place, Melbourne Chair: Mr Tony Cole, Principal-National Practice Leader, Mercer Investment Consulting Speakers at this Forum will be Dr Sarah Squire, Senior Policy and Research Officer, Sex and Age Discrimination Unit,

Human Rights and Equal Opportunity Commission, Mr Paul Shepanski, Relationships Forum Australia and Professor Mark Wooden, Acting Director and Director, HILDA Survey, Melbourne Institute, The University of Melbourne Melbourne Institute Public Economics Forum (Canberra) Tuesday 26 June, 2007, 12.00 - 1.45pm Federation Ballroom South, Hyatt Hotel Canberra Chair: TBA Speakers at the Canberra Forum will be The Hon John von Doussa QC, President, Human Rights and Equal Opportunity Commission, Mr Paul Shepanski, Relationships Forum Australia and Professor Mark Wooden, Acting Director and Director, HILDA Survey, Melbourne Institute, The University of Melbourne For information on upcoming and previous forums, please visit our website www.melbourneinstitute.com/forums.

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Recent Melbourne Institute Working Papers 16/2007 15/2007 14/2007 13/2007 12/2007 11/2007 10/2007 09/2007 08/2007 -

‘Trade Liberalisation, Exit, and Output and Employment Adjustments of Australian Manufacturing Establishments’, Alfons Palangkaraya and Jongsay Yong.

‘Children, Labour Supply and Childcare: Challenges for Empirical Analysis’, Guyonne Kalb.

‘The Effect of an Alternative Childcare Subsidy on Labour Supply: A Policy Simulation’, Guyonne Kalb and Wang-Sheng Lee. ‘Childcare Use and Parents’ Labour Supply in Australia’, Guyonne Kalb and Wang-Sheng Lee. ‘The Changing Socio-Demographic Composition of Poverty in Australia: 1982 to 2004’, Roger Wilkins.

‘Geographical Agglomeration in Australian Manufacturing’, Anne Leahy, Alfons Palangkaraya and Jongsay Yong.

‘Dynamics of Work-Limitation and Work in Australia’, Umut Oguzoglu.

‘Overskilling, Job Insecurity and Career Mobility: Evidence from Australia’, Seamus McGuinness and Mark Wooden.

‘Who Are the Low Waged?’, Seamus McGuinness and John Freebairn.

Working papers can be downloaded for free from www.melbourneinstitute.com.

Wages Growth Accelerates According to the latest release of the Melbourne Institute Wages Report, wages growth has accelerated markedly.

Figures released in the May 2007 report showed that total pay indicator growth accelerated to 3.7 per cent in the 12 months to May 2007, from 1.5 per cent in the year to February.

The report showed that workers on enterprise agreements were more likely to report an increase in both their basic hourly wage rates and total pay compared to those on other types of employment contracts. However, employees on individual contracts reported larger average increases in both their wage rate and their total pay (almost double).

Expectations about wage growth over the next 12 months have also increased significantly, to an average of 3.0 per cent, up from 1.8 per cent in February.

The Melbourne Institute Wages Report is a subscription based service that provides up-to-date information on wage pressure in the economy. This publication provides the most immediate data, collected one week prior to the reports release.

For further information please call 03 8344 2196 or visit www. melbourneinstitute.com/research/macro/wages.html.

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. Contributors: Dr Paul Jensen, Dr Guyonne Kalb, Dr Rosanna Scutella, Professor Stephen Sedgwick, Dr Beth Webster, Professor Mark Wooden.

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