#9 September 2005 - Melbourne Institute News

Melbourne Institute News September 2005 ISSN 1442-9500 (print)

ISSN 1442-9519 (online)

Print Post Approved PP381667/01204

Issue 9

Inequalities of Aussie Wealth

The HILDA Survey An overview of Australia’s first significant householdbased panel study, the HILDA Survey, and the upcoming HILDA Survey Research Conference.

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From Unemployment to DSP Lixin Cai and Bob Gregory find that over 40 per cent of new DSP recipients moved directly from unemployment benefits to DSP between 1997 and 2002.

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Regulating Smokers Hielke Buddelmeyer and Roger Wilkins find that stringent new smoking regulations do encourage some smokers to stub out their butts for good, but not defiant young smokers, who just keep puffing away.

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Opinion John Freebairn shares his opinion on the current unemployment rate of 5 per cent, believing it to be closer to 10 per cent.

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Stark inequalities of wealth in Australia are documented by the Melbourne Institute of Applied Economic and Social Research in the first significant study of individual wealth holdings since World War 1.

Among the Melbourne Institute’s findings is that the ‘bottom half ’ of Australia’s population owns less than 10 per cent of total household net worth, while the wealthiest 10 per cent owns 45 per cent.

The study was conducted by Melbourne Institute researchers Dr Bruce Headey, Dr Gary Marks and Professor Mark Wooden as part of the HILDA Survey.

Their findings are based on an analysis of the distribution of household wealth in Australia and its relationships with demographic and social factors.

According to Dr Marks, finding an unequal wealth distribution was not unexpected. He says that although there is no evidence that wealth inequality has increased over the past decade, wealth is much more unequally distributed than household income.

Dr Headey, referring to findings that property is the largest component of assets, says many Australians end up with no cash when they retire because they have locked it into their house.

He also points out that wealth is heavily skewed to age. ‘Wealth is only weakly related to a person’s socioeconomic background’, he comments.

‘These findings are significant to all Australians’, says Professor Wooden.

Cont’d page 2.

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

Inequalities of Aussie Wealth

HILDA Conference

Other findings in the study include:

The Household, Income and Labour Dynamics in Australia (HILDA) Survey is the first significant household-based panel study conducted in Australia.

• The average wealth of the wealthiest 10 per cent is about $1.8 million.

• The largest component of both assets and debt is property.

• Wealth is strongly associated with age. The median wealth of individuals aged 55–65 years is $444,000 compared to $8000 among those aged 18–24 years.

• University education is associated with substantially higher levels of wealth.

• Singles and single-parent households have the lowest levels of wealth.

• Pensioners are well short of the wealth that would enable them to live a ‘comfortable lifestyle’, as determined by the Association of Superannuation Funds of Australia.

• Even accounting for age differences, marriage and to a lesser extent de facto relationships are associated with greater wealth.

• The effect of divorce on wealth differs between men and women.

• Children are associated with less wealth.

• Smokers are less wealthy.

• Drinkers are wealthier, unless they are heavy drinkers.

• Exercise makes no difference to levels of wealth.

Professor Wooden says that while studies have been conducted by financial institutions in the past, the information collected through the HILDA Survey is from individuals representing the Australian population.

This article, entitled ‘The Structure and Distribution of Household Wealth in Australia,’ was released in the June issue of the Australian Economic Review.

Funded by the Commonwealth Government through the Department of Family and Community Services, it began in 2001 and currently has guaranteed funding for a total of eight waves.

The HILDA Survey collects information about income, labour market and family dynamics. Interviews are conducted annually with all adult members of participating households who are followed over time.

Special questionnaire modules are included in each wave and the number of individuals interviewed during wave 3 grew to 19,987.

The HILDA Survey has a vast array of information of significant interest for researchers.

Over 480 user licences have been approved with users spanning government, academics, students and other organisations. Licences can be purchased for a nominal fee and datasets then downloaded from the HILDA website.

Despite the youth of the HILDA Survey, a relatively large volume of research output based on the HILDA Survey data has already appeared (including books, chapters and articles). The HILDA Survey has also been the focus of considerable media attention over the past few years.

Key research findings from the HILDA Survey will be presented at the upcoming HILDA Survey Research Conference. The conference includes keynote speakers on topics such as ‘Multiple dimensions of poverty and disadvantage’, ‘The impact of alcohol abuse on employment prospects’, ‘Characteristics of self-funded seniors’ and many more.

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.

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/hilda/conf2005.html.

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From Unemployment to DSP The article also examined what factors were associated with the transition. Among the observed characteristics, it was found, not surprisingly, that older unemployed people, and people having some health problems, were more likely to transfer to DSP, while those who had some labour market attachments while on unemployment benefits were less likely to experience the transition.

Importantly, the research found that unemployment duration does matter in the transition—the longer people are on unemployment benefits, the higher is the probability of transferring to DSP from unemployment receipt.

Most new recipients of the Disability Support Pension (DSP) Program between 1995 and 2002 were individuals transferring from another income support payment according to a recent article by Dr Lixin Cai and Professor Bob Gregory.

The authors found that the major payment types where DSP recipients came from were the unemploymentrelated benefits, such as the Newstart Allowance. Further, the article shows that between 1997 and 2002, over 40 per cent of new DSP recipients moved directly from unemployment benefits to DSP. If the transition occurs only because people use these other payments, particularly unemployment benefits, while waiting for their applications for DSP to be assessed, this phenomenon should not be a worry from a policy point of view. However, the findings indicate that is not the case.

The findings show that among those people who transferred to DSP from unemployment benefits, a large proportion experienced multiple spells of income support receipt prior to the transition. A majority of these people had more than a six-month pre-transition unemployment duration, with the average pre-transition unemployment duration being more than one year. This pre-transition unemployment duration is much longer than the time normally required for DSP application assessments. In addition, these people had even longer durations on the income support system before entering DSP if other payments were taken into account.

While it is not possible from the administrative data to find the reasons for the relationship between unemployment duration and the transition to DSP, the article offers several possible explanations. First, perhaps people’s skills may depreciate as unemployment duration lengthens. Consequently, the longer people stayed in unemployment, the harder it was for them to find a job, and the more attractive the DSP payment was for them. Second, an individual’s health may deteriorate with unemployment duration, increasing the demand for disability benefits and the probability of an application being granted. Finally, long unemployment duration may work as a signal to the program administrative authority (i.e., Centrelink) of the inability of the applicant to work, increasing the probability of being granted a DSP. For future research on this issue the administrative data need to be supplemented by survey data that focus more clearly on the driving forces underlying the relationship between unemployment duration and disability benefit participation.

The data source used in this research was the Longitudinal Data Set provided by the Australian Department of Family and Community Services.

This article, entitled ‘Unemployment Duration and Inflows onto the Disability Support Pension Program: Evidence from FaCS LDS Data’, will be published in the September issue of the Australian Economic Review.

Melbourne Institute of Applied Economic and Social Research - Page 3

Regulating Smokers on 1 January and 31 May. Exploiting the variation in smoking legislation over time and across States enables the identification of the effect of such measures on individual smoking behaviour.

Tougher smoking regulations receive a lot of public attention when they are announced. They also generate a bit of a buzz when they first come into effect.

U2’s Bono got in trouble for openly smoking in his own pub in Ireland, three months after the introduction of a ban. And when smoking became prohibited in New York City restaurants the chef of Serafina Sandro restaurant introduced a ‘Tobacco Special’ menu incorporating tobacco in his dishes. It was reported that bars in New Jersey were booming as they still allowed smoking, although it was not clear if that was due to locals no longer going to Manhattan or because of an influx of New Yorkers.

These anecdotal accounts of the effects of smoking bans pose the following questions. Do these measures only influence when and where one smokes? Do they also influence whether one smokes at all? These questions are rarely asked and get little attention when compared with all the studies on the effect of smoking bans on particular businesses such as bars or casinos. Nevertheless, from a public policy point of view it is important to know how individual smoking rates are affected.

The collection of the first three waves of HILDA data coincides with a period in Australia when Queensland, Victoria and the Northern Territory introduced tougher smoking regulations. Queensland’s Tobacco and Other Smoking Products (Prevention of Supply to Children) Act 2001 took effect on 31 May 2002. Later that same year Victoria’s Tobacco (Miscellaneous Amendments) Act 2002 became effective. The Northern Territory’s Tobacco Control Act 2002 came about in two stages in 2003,

The use of a nationally representative dataset is an important advance on previous studies of the role of smoking regulation that often use establishmentlevel data, from which it is hard to generalise findings.

Furthermore, the longitudinal nature of HILDA allows us to track smoking behaviour of individuals over time, which is an important improvement over studies using repeated cross-sections. Smoking rates have been declining for most of the developed countries. Table 1 gives a snapshot of Australian smoking rates and annual per capita cigarette consumption—measured by production plus imports minus exports—compared with a few selected countries. Table 2 shows smoking rates in Australia from 1991 to 2004. What these numbers do not show are the dynamics of smoking, for example, how many people start and quit smoking. It is true that over time, on average, there are fewer Australians who smoke, but there are people who (again) pick up smoking too.

An example of the underlying dynamics, Table 3 displays transitions in smoking status in wave 2 and wave 3.

To analyse the effects of tougher smoking regulations a model was used that predicts who smokes in a given year, who smokes next year given their current smoking status, and who is retained in the sample between waves.

The results for smoking in a particular year are in line with what many previous studies have found. Smoking is negatively correlated with educational attainment, being female and being married. Controlling for previous smoking status, there are very few good predictors of who quits smoking and who picks up smoking. Getting pregnant is the notable exception, making you much more Table 1 Adult Smoking

Australia

Total (%)

Male (%)

Female (%)

Annual per person cigarette consumption

19.5

21.1

18.0

1907

New Zealand

25.0

25.0

25.0

1213

France

34.5

38.6

30.3

2058

UK

26.5

27.0

26.0

1748

USA

23.6

25.7

21.5

2255

Source: Table A The Demographics of Tobacco (WHO 2002).

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likely to quit if you were a smoker, and much less likely to pick up smoking if you were a non-smoker. If you were a non-smoker, getting separated or divorced from your partner, and drinking at least once a week are strongly correlated with picking up smoking.

The results also suggest a ‘defiance’ effect among smokers aged 18 to 25 years, who are most likely to continue smoking in precisely those States that introduced tougher smoking regulations. Explicitly controlling for attrition and item non-response is shown to be important and can be predicted well by using the interviewer assessments of respondent cooperativeness.

The estimates of the overall effect of the tougher smoking regulations do indeed imply you are more likely to quit and less likely to pick up smoking if smoking bans are imposed. The effect on quitting is generally stronger than the effect on taking up the habit. However, for individuals aged 15 to 18 years, the effect on preventing the take-up of smoking is stronger than the effect on quitting behaviour.

The full findings of this research by Drs Hielke Buddelmeyer and Roger Wilkins will be presented at the HILDA Survey Research Conference which will be held at the University of Melbourne on 29–30 September 2005.

Table 2 Smoking Status of the Australian Population Aged 14 (15) Years and Over (percentages) Smoking status

1991a

1993a

1995a

1998a

2001a

24.3

25.0

23.8

21.8

19.5

Weekly

2.8

2.3

1.6

1.8

1.6

Less than weekly

2.4

1.8

1.8

1.3

2.0

Ex-smoker

21.4

21.7

20.2

25.9

26.2

Never smoked

49.0

49.1

52.6

49.2

50.6

Daily

2001b

2002b

2003b

2004a

18.7

18.4

17.4

2.4

2.2

1.6

1.9

1.8

1.6

26.2

27.1

27.0

26.4

51.0

50.0

50.6

32.9

22.8

(a) Source: Australian Institute of Health and Welfare (2005) Australia’s Health 2004, Canberra: AIHW (Table 3.1). (b) Author’s own population-weighted estimates using waves 1 through 3 of the Household, Income and Labour Dynamics in Australia (HILDA) Survey. Population 15 and over. Smoking in wave 1 was not distinguished between daily, weekly and less than weekly.

Table 3 Transitions in Smoking Status from Wave 2 to Wave 3 (population-weighted row percentages) Wave 3 status Wave 2 status

No info

Never

No longer

Daily

Weekly

Less than weekly

Never

15.46

80.13

3.18

0.33

0.33

0.57

No longer

13.90

7.36

73.08

3.06

1.10

1.50

Daily

19.60

0.27

7.86

69.10

2.33

0.85

Weekly

16.02

2.54

19.95

29.48

22.82

9.19

Less than weekly

18.19

6.33

23.30

13.46

15.51

23.20

Melbourne Institute of Applied Economic and Social Research - Page 5

Opinion,

by John Freebairn

Some of the people in receipt of the disability support pension and the sole parent pension could be coached into work if there were better employment prospects. In aggregate, a more embracing measure of unemployment exceeds 10 per cent.

A challenging macroeconomic policy question is how low can unemployment fall before wage pressures in the labour market threaten a resurgence of inflation?

The laudable achievement of an unemployment rate of 5 per cent should not be regarded as the best which can be achieved. Employment for all is an important social goal, the headline unemployment rate substantially understates the numbers who would like a job, and there is little evidence of a wage break-out to threaten inflation targets.

Even the headline unemployment rate of 5 per cent leaves over 500,000 people out of a job and with a sense of less than full membership of the community. Over 17 per cent of children are living without an employed parent.

Until recent years, most economic studies on the natural rate of unemployment suggested a minimum rate of unemployment of 6 per cent or more. Clearly the last few years show that these estimates are inconsistent with the facts.

While there are some areas of particular labour shortages and wage pressures, general measures of wage inflation, especially of unit labour costs, remain within Reserve Bank and Treasury target bounds. Lower achievable unemployment rates without inflation in the current decade may reflect the effects of such structural changes as a more flexible economy and labour market, the greater generosity of pensions relative to unemployment allowances, and greater confidence in the credibility of macroeconomic policies.

Thus, there seems to be a good case for what Alan Greenspan has referred to as policy settings to ‘gradually nudge down the unemployment rate’.

In the 1950s and 1960s we considered a 2 per cent unemployment rate as too high for a society that is proud of ‘a fair go for all’, self-support and equality of opportunity.

The headline unemployment rate, whose measurement follows standard international conventions, underestimates the number of people who want work.

Other ABS data indicate many more people would like a job or more work.

Up to a third of part-time employees, some of the selfemployed and even some full-time employees would like to work more hours. Another 850,000 people are recorded as marginally attached to the workforce in the sense that they would like a job but have either not actively searched for a job or were unavailable to start within a week (and are officially recorded as not in the workforce).

Upcoming Forums Innovation is the key to productivity growth. That is the theme to be explored at the next two forums to be held as follows: Business Economics Forum Thursday 1 December, 12.00pm–1.45pm Fairmont Room, Park Hyatt Hotel, Melbourne Public Economics Forum Tuesday 29 November, 12.00pm–1.45pm Hyatt Hotel Canberra, Canberra

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Younger Companies More Innovative

Patent Office Disharmony

Whilst the value of patents, trade marks and designs has been rising over the period 1989 to 2002, older companies appear to be losing out on the profits.

There is substantial disharmony in the outcome of patent examinations by patent offices around the world, according to a recent study by the Melbourne Institute.

A study led by the Melbourne Institute found that older companies have a harder time extracting profit out of their patentable inventions than younger companies.

The study found that whilst most developed countries apply the same criteria to determine whether an invention is eligible to be protected by a patent, a substantial number of patent applications are granted in one jurisdiction and rejected in others.

The average effect of the stock of intellectual property rights on realised profits was greatest for patents, followed then by trade marks. Designs were found to be the least profitable of the three.

One of the authors of the report, Dr Beth Webster of the Melbourne Institute, said ‘This evidence is consistent with the notion that company profits are increasingly depending on their innovative capital and other intangible assets’.

The study team used actual profits in their analysis rather than the present value of expected profits to depict firm performance and also found that older firms derived lower average profits from their trade marks than younger firms did, which, it was suggested, could be a company lifecycle effect.

The study did point out, however, that overall innovation has a positive effect on the performance of the firm.

The report authored by William E. Griffiths, Paul H. Jensen and Elizabeth Webster is entitled ‘The Effects on Firm Profits of the Stock of Intellectual Property Rights’ and is available on the Melbourne Institute website, www.melbourneinstitute.com.

The Trilateral Patent Offices, including the United States Patent Office (USPTO), the Japanese Patent Office (JPO) and the European Patent Office (EPO), recorded significant differences between applications, with the Melbourne Institute study finding that the overall rejection rate for patent applications was 25 per cent for the JPO and 5 per cent for the EPO. These differences, say the authors, have adverse economic effects as they increase uncertainty into the firm’s investment decisions.

‘Given recent efforts to harmonise world patent law, it is alarming to see how much disharmony in patent examination decisions actually exists’, said Dr Paul Jensen, one of the authors.

The paper, written by Paul H. Jensen, Alfons Palangkaraya and Elizabeth Webster, is entitled ‘Patent Application Outcomes across the Trilateral Patent Offices’ and is available on the Melbourne Institute website, www.melbourneinstitute.com.

Sustaining Prosperity The anticipated follow up book to the successful Sustaining Prosperity conference has arrived. The conference was held on 31 March and 1 April 2005 and was jointly organised by the Melbourne Institute and The Australian.

Edited by Peter Dawkins and Michael Stutchbury, Sustaining Prosperity brings together the contributions of many leading Australians who spoke at the conference to examine the development of policies that will ensure a prosperous future for Australia.

The Melbourne Institute currently has a limited number of copies of Sustaining Prosperity available at a discounted rate of $22.00.

Order online at www.melbourneinstitute.com or call Michelle Best on (613) 8344 2100.

Melbourne Institute of Applied Economic and Social Research - Page 7

Recent Melbourne Institute Working Papers September 2005, ‘The Persistence of Long Work Hours’, 12/05, Robert Drago, David Black and Mark Wooden.

August 2005, ‘A Comparison of Alternative Tax Bases’, 11/05, John Freebairn.

July 2005, ‘The Effect of Financial Incentives on Labour Supply: Evidence for Sole Parents from Microsimulation and Quasi-Experimental Evaluation’, 10/05, Lixin Cai, Guyonne Kalb, Yi-Ping Tseng and Hong Ha Vu. July 2005, ‘Health Status and Labour Force Status of Older Working-Age Australian Men’, 9/05, Lixin Cai and Guyonne Kalb.

June 2005, ‘Experimental and Quasi-Experimental Methods of Microeconomic Program and Policy Evaluation’, 8/05, Jeff Borland, Yi-Ping Tseng and Roger Wilkins.

June 2005, ‘Preferred vs Actual Working Hours in Couple Households’, 7/05, Yi-Ping Tseng and Mark Wooden.

May 2005, ‘Determinants of International Patent Examination Outcomes’, 6/05, Alfons Palangkaraya, Paul H. Jensen and Elizabeth Webster.

UK Professor to Lead the Labour Economics and Social Policy Area The Melbourne Institute is pleased to announce the appointment of Professor Kostas Mavromaras. Kostas will work in the capacity of Head of the Labour Economics and Social Policy area.

Kostas was previously employed at the University of Aberdeen since 2000 and prior to that at the University of Newcastle upon Tyne. He has a DPhil from York, UK and is Research Fellow of the Alexander-von-Humboldt Foundation (since 1984), the IZA (since 1998) and the Manchester School (since 2004).

From 2002 to 2005 he was Director of the Centre for European Labour Market Research, University of Aberdeen, where he also worked for two years at the Health Economics Research Unit.

His main research interests lie in the general areas of applied economic theory, microeconometrics and economic policy with specific reference to labour markets.

His publications include papers in the Economic Journal, Journal of Public Economics, Journal of Human Resources, Oxford Bulletin of Economics and Statistics and Journal of Applied Econometrics. He has advised several organisations including the Federal Employment Office, Germany, the Centre for Economic Planning, Greece, and the Scottish Executive on labour, education and health issues. Kostas is Associate Editor of the Manchester School.

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 Hielke Buddelmeyer, Dr Lixin Cai, Professor John Freebairn, Professor Bob Gregory, Dr William E. Griffiths, Dr Bruce Headey, Dr Paul Jensen, Dr Gary Marks, Dr Alfons Palangkaraya, Dr Beth Webster, Dr Roger Wilkins, Professor Mark Wooden.

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