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Melbourne Institute News March 2010 ISSN 1442-9500 (print)

ISSN 1442-9519 (online)

Print Post Approved PP381667/01204

Issue 27

New Director for Melbourne Institute Professor Deborah Cobb-Clark has been appointed Director of the Melbourne Institute and Ronald Henderson Professor at the University of Melbourne, with her appointment commencing on 27 April 2010.

Professor Deborah Cobb-Clark and Professor Margaret Abernethy

HILDA Survey The HILDA Survey, Australia’s only nationally representative household panel survey of work and family life, enters its tenth wave of data collection, with the first eight waves of the data currently available to researchers. Page 3

PricewaterhouseCoopers Melbourne Institute Asialink Index The latest release of this Index shows that the growth of Australia’s engagement with Asia outpaces its interactions with the rest of the world. Page 4

Pacific Rim Innovation Conference 2010 This inaugural conference fostered an interdisciplinary exchange of knowledge on the economics, management and law of innovation. Page 4

Professor Cobb-Clark was previously Head of the Economics Program at the Research School of Social Sciences, and inaugural Director of the Social Policy Evaluation, Analysis and Research (SPEAR) Centre at the Australian National University. A world expert on the effects of public policies on labour market outcomes, much of Professor Cobb-Clark’s research has focused on immigration policy and how this might affect the labour market outcomes of migrants. She has also examined how the receipt of income support affects young people’s decisions to engage in risky behaviour and the role of gender in promotions, occupational choice and wages. She is currently leading the innovative Youth in Focus project, a longitudinal survey funded by the Australian Research Council and the Commonwealth Government. Professor Margaret Abernethy, Dean of the Faculty of Business and Economics, says the Faculty is delighted to have attracted a person of Professor Cobb-Clark’s background and extensive experience as Director of its widely-respected Melbourne Institute. “Professor Cobb-Clark is a world leader in her field. Her prodigious talent for research will build on the Melbourne Institute’s already outstanding research record.” These sentiments have been strongly endorsed by Professor Mark Wooden, who has been Acting Director since the resignation of the former Director in mid-2009. “The Melbourne Institute has been extremely fortunate to secure the services of Professor Cobb-Clark”, said Professor Wooden. “Her research interests are strongly aligned with the Institute’s mission, and I look forward to working with her in the years ahead.”

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


Household Savings

Research on Youth

The Melbourne Institute Household Financial Conditions Index fell by 16.6 per cent (from 34.5 in December 2009 to 28.8 in March 2010), indicating that households’ financial positions in the March quarter were worse than their financial positions in December.

Recently released in the Melbourne Institute Working Paper series, ‘The Effects of Macroeconomic Conditions on the Education and Employment Outcomes of Youth’ examines the effects of macroeconomic conditions on education and employment outcomes of young people after they have left school.

This is the first decrement after four consecutive quarters of improvement. The changes in financial conditions across the states were: Western Australia (–17.7 per cent), Victoria (–6.9 per cent), Queensland (–6.7 per cent), New South Wales (–1.9 per cent), and South Australia (+7.8 per cent). The Melbourne Institute Savings and Investment Report also collects information about the percentage of households who are running into debt and/or drawing on their savings (considered to be financially stressed). This percentage has been rising since late 2009. Data in the table below show the distribution of the financially stressed in March 2010 between the employed and unemployed (which includes retirees) and across household income groups. The table reveals two unsettling developments. First, more than half of the 14.4 per cent of households who consider themselves to be financially stressed are employed; and second, employed people with household income of over $80,000 per annum are the most financially stressed out of all groups. Distribution of the ‘Financially Stressed’ (per cent) Household Income (’000) Employed <20 0.0 20–40 1.0 40–60 1.8 60–80 1.4 >80 4.2 Total 8.4

Retirees/ Unemployed 2.0 1.9 0.6 0.6 0.8 6.0

Total 2.0 2.9 2.4 2.0 5.0 14.4

Source: Melbourne Institute

Enquiries can be directed to Professor Guay Lim, Director, Applied Macroeconomics research program, email <g.lim@ unimelb.edu.au>.

Unlike the existing studies focusing either on employment or on education, this study investigates jointly the education and work decisions. The authors, Nicolas Hérault, Weiping Kostenko, Gary Marks and Rezida Zakirova, conclude that both the unemployment rates, and to a lesser extent economic growth rates, have an impact on youths’ education and employment outcomes. While the outcomes differ by gender and by level of education, the overall effects of GDP growth are positive — encouraging youths to invest in further education and facilitating school-to-work transitions. The results reveal that increases in the unemployment rate tend to drive young people out of full-time work and into inactivity or part-time work. In addition, increases in the unemployment rate tend to discourage further education. Overall, GDP growth effects are fairly small, particularly for males, and the effects of the unemployment rate appear to be more important. Only females with a university degree become more likely to pursue further education, thus delaying their entry to the labour market, whereas other females become less likely to study, perhaps perceiving increased uncertainty in terms of the returns to education. The research study was commissioned by the Australian Government Department of Education, Employment and Workplace Relations under a Social Policy Research Services Agreement (2005–09). The dataset in the study covers the period from 1985 to 2006. The Working paper (2/10) is available from the Melbourne Institute’s website at <www.melbourneinstitute.com>. Enquiries:  Dr Nicolas Hérault <nherault@unimelb.edu.au>.

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HILDA Survey Enters Its Tenth Year The Melbourne Institute has managed the Household, Income and Labour Dynamics in Australia (HILDA) Survey since its commencement in 2001. HILDA is Australia’s only nationally representative household panel survey of work and family life. This year the study enters its tenth wave of data collection, with the first eight waves of the data currently available to researchers. 2009 saw the transition to a new fieldwork provider, Roy Morgan Research, and a new method of interviewing — computer-assisted personal interviewing, or CAPI. Despite these significant changes and the potential adverse consequences for response rates that they bring, the rate of respondent retention achieved in Wave 9 has been our best yet. Preliminary data show a headline response rate for Wave 9 of 96.1 per cent, which is the percentage of respondents from Wave 8 who were re-interviewed in Wave 9. This is the highest annual response rate achieved by the HILDA Survey to date. It also compares favourably with the British Household Panel Survey, which began 10 years earlier. The transition to CAPI has also been very well received by interviewers, who quickly became adept at using the hand-held tablet and stylus (pictured). Nicole Watson, HILDA Deputy Director of Survey Methodology, says that “the interviewers much prefer this paperless way of conducting the interviews, as the CAPI program helps them through the complicated routing and ensures that unusual answers can be immediately checked with the respondent. We are looking forward to consolidating our experience with this technology as we prepare for the next wave of interviews in 2010.”

use of health services. The topics covered in this module included respondent health expectations; difficulties caused by health conditions or disabilities (previously included in Wave 4); serious illness conditions experienced; retrospective childhood health; private health insurance (previously included in Wave 4); utilisation of health services; respondent diet (previously included in Wave 7); and health of household children under 15 years of age and their use of health services. The expectation is that this health module will be repeated every four years. The data from Wave 9 will be released in December 2010. The HILDA Survey project was initiated and is funded by the Australian Government Department of Families, Housing, Community Services and Indigenous Affairs.

The key feature of Wave 9 in terms of questionnaire content was the inclusion of a new module which enhances information about respondent health, and

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PricewaterhouseCoopers Melbourne Institute Asialink Index The second annual PricewaterhouseCoopers Melbourne Institute Asialink Index is now available to download from the Melbourne Institute’s website. The Index shows that the growth of Australia’s engagement with Asia continues to outpace its interactions with the rest of the world, and the uptake of educational services could provide the key to stronger relations with Asia. Since 1990, Australia’s regional relationships have multiplied four and a half times compared to only a threefold increase in engagement with its traditional US and European allies. The Index also shows that Japan reclaimed its position from China as Australia’s leading trade partner in 2008. Japan, the world’s second largest economy, accounted for nearly one-third (30 per cent) of Australia’s exports to Asia, and provided 17 per cent of Australia’s imports. Japan also provided Australia with its largest capital injection from Asia, with investments totalling $20.3 billion — a 58 per cent increase on the prior year. A substantial fall in Australian business visits to Asia contributed to the Research and Business Development Index dropping 10.3 per cent — the most significant decline since 1999. Japan, China and South Korea were among countries that recorded falls in this area during 2008. The Index measures changes in engagement between Australia and 25 Asian economies across key areas including trade, investment, tourism, education, migration, business development and humanitarian assistance between 1990 and 2008. The PricewaterhouseCoopers Melbourne Institute Asialink Index is available to download from the Melbourne Institute’s website at <www.melbourneinstitute.com/pwc-mi-asialink/default.html>.

Pacific Rim Innovation Conference 2010 The inaugural Pacific Rim Innovation Conference 2010 was held in Melbourne on 21 and 22 January to foster an inter-disciplinary exchange of knowledge by scholars working on the economics, management and law of innovation. The focus was on intellectual property; markets for technology; R&D; government innovation policies; and key challenges of the 21st century (for example, climate change, gene patents, nanotechnology). The event was organised by the Intellectual Property Research Institute of Australia (IPRIA) with support from the Institute of Innovation Research (Hitotsubashi University), the NUS Business School (National University of Singapore) and the University of Auckland Business School. Philip Noonan, Director General of IP Australia, gave the opening address, followed by the first plenary session keynote speakers: Rochelle C. Dreyfuss (Pauline Newman Professor of Law, New York University School of Law) and Ivan Png (Lim Kim San Professor, School of Business and Professor of Information Systems and Economics, National University of Singapore). In the final plenary session the two keynote speakers were Peter Drahos (Regulatory Institutions Network (RegNet); College of Asia and the Pacific, Australian National University) and Vincenzo Denicolo (Department of Economics, University of Bologna). On day two, attendees participated in a discussion on the international agreement on Trade Related Aspects of Intellectual Property Rights (TRIPS), facilitated by panelists (pictured left to right) Peter Drahos, Sadao Nagaoka, Graeme Austin and Alfons Palangkaraya. Available presentations from the conference can be downloaded from IPRIA’s website at <www.ipria.org/>. Page 4 - Melbourne Institute of Applied Economic and Social Research


Hospital Performance under the Microscope Given the Rudd government’s proposed reform in federal funding to hospitals, new research now underway at the Melbourne Institute is timely and policy-relevant in assessing overall progress towards improved health services. The Melbourne Institute has commenced work on a five-year partnership grant to measure, assess and explain hospital performance as part of the National Health and Medical Research Council’s funding program, ‘NHMRC Partnerships for Better Health’. The aim of the collaborative research is to improve the generation and use of knowledge to measure, understand and improve hospital performance and patient care. As a start, the research team will develop and use existing hospital data to examine the key drivers of hospital costs and performance. The Victorian Department of Human Services will contribute additional funding for the project and is the Melbourne Institute’s collaborative partner on this project. This research partnership will help build long-term capacity to evaluate policies and incentives for improving hospital performance in Australia. The research has three Chief Investigators: two from the Melbourne Institute, Professor Tony Scott (Director of the Health Economics research program) and Dr Jongsay Yong, and Dr Vijaya Sundararajan from the Victorian Department of Human Services. The project will apply a rigorous and in-depth understanding of the relationship between efficiency and quality of care, which is critical in developing policy initiatives to improve hospitals’ performance. The research will provide a solid foundation by which to evaluate the impact of changes in hospital funding policy on hospital costs and quality of care. Enquiries can be directed to Professor Tony Scott, ARC Future Fellow, Melbourne Institute, email <a.scott@unimelb.edu.au>.

Forthcoming Melbourne Institute Economics Forums The Melbourne Institute is holding the next Public Economics Forum — ‘Retirement Savings’ — at the Hyatt Hotel in Canberra on Tuesday 13 April 2010. The Forum content will be repeated at the next Economics Forum in Melbourne being held at the Sofitel on Thursday 15 April 2010. As a result of the increasing proportion of older persons within our population, retirement policies (such as changing the Age Pension age) and policies affecting retirement decisions (such as the taxation of contributions to, and benefits from, superannuation funds), the Forum will address important topics for discussion and research. The three speakers will be Dr Yi-Ping Tseng (Senior Research Fellow, Melbourne Institute) on savings adequacy and the incentive to save; Dr David Knox (Worldwide Partner, Mercer (Australia) Pty Ltd) on Australian retirement: where are we going and how do we compare internationally?; and Professor Ross Guest (Professor of Economics, Griffith Business School, Griffith University) on policy options for retirement savings. The Chair will be Mr Tony Cole, Business Leader for Investment Consulting in Asia Pacific, Mercer (Australia) Pty Ltd. Further information is available at <www.melbourneinstitute.com/forums/pub_forums.html > or please enquire with Penny Hope on (03) 8344 2151 or by email <p.hope@unimelb.edu.au>. Melbourne Institute of Applied Economic and Social Research - Page 5


The Energy Sector and Climate Change Professor Ross Garnaut, Vice-Chancellor’s Fellow and Professorial Fellow in Economics at the University of Melbourne, and who is located within the Melbourne Institute, gave a presentation about the future of carbon trading in Australia, at an Energy Futures Seminar in Melbourne on 17 February 2010, organised by the University of Melbourne’s Energy Research Institute. In the wake of the Copenhagen UNFCCC meeting, Professor Garnaut’s speech explored the outlook for global climate change mitigation, and Australia’s contribution to greenhouse gas emissions, with particular reference to the Australian energy sector. Professor Garnaut said that nothing had changed materially in the science over recent times: if there were no effective global effort to reduce emissions of greenhouse gases, increases in the emissions would probably generate climate change that is deeply problematic for human society, and the risks are greater for Australia than other developed economies. “If the world as a whole is to reduce emissions entitlements by 50 per cent by 2050, developed countries will have to reduce them by nearly 90 per cent. Australian emissions would have to fall by about 25 per cent by 2020 and 90 per cent by 2050.” In his speech, Professor Garnaut explained that a binding international agreement on climate change mitigation would provide the framework for large emissions reductions at the lowest possible economic costs. “Australia needs radical reductions in emissions from energy use in general and electricity generation in particular. The amount and the cost of reductions in emissions through land-use change, agriculture and forestry (biological processes) are in their early development stages, yet are in need of major research effort” he said. The Garnaut Climate Change Review (2008) recommended support for research, development and commercialisation of low-emissions technologies, funded by sales of emissions permits, which would have a powerful effect in accelerating innovation. Professor Garnaut said “Australia is ideally placed for a transformation to a low-emissions energy sector, because we have abundant coal, gas, uranium, geothermal, solar and other renewable resources, and exceptional opportunities for geosequestration and biosequestration of carbon dioxide. Over the longer term, a critical factor likely to determine the structure of the electricity supply sector and the future of fossil fuels is achieving near-zero emissions carbon capture and storage — and priority should be given to resolving whether a near-zero coal future is feasible.” Professor Garnaut said that regulatory approaches are inferior to market-based approaches to complex resource allocation through an Emissions Trading Scheme or a carbon tax, with part of the revenue supporting research, development and commercialisation of new technologies. “An Emissions Trading Scheme needs to put a price on the external costs of carbon emissions, from which some of the revenue would be used to support research, development and commercialization of low-emissions technologies” said Professor Garnaut. A full copy of this speech delivered by Professor Ross Garnaut is available to download from the University of Melbourne’s website at <www.energy. unimelb.edu.au/index.php>.

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Australian Economic Review: March 2010 Issue The March issue of The Australian Economic Review includes an article about the state of the Australian economy in 2009–10 written by Melbourne Institute staff (Guay Lim, Michael Chua, Edda Claus and Sarantis Tsiaplias). The article reviews the economic factors which have helped Australia survive the global financial crisis in 2009 and discusses the prospects and risks on the road to economic recovery in 2010. The authors discuss how several factors — the state of the Chinese economy with its continuing demand for Australian exports; the role of the fiscal stimuli in boosting business and consumer confidence; the timely actions of the Reserve Bank to maintain confidence in the banking sector as well as to generate an easing of monetary policy; and the flexibility in the labour market — have helped Australia escape a recession in 2009. Contributed articles in the March issue include: ‘Does Maternal Age Affect Children’s Test Scores?’ by Andrew Leigh and Xiaodong Gong. This article finds that young motherhood appears to be a marker, and not a cause, of poor child outcomes. The article ‘Technological Change in Australian Manufacturing’, by Harry Bloch, estimates the rate of technological change in 38 Australian manufacturing industries, using data over the period 1968–69 to 1999–2000. The article ‘Income Redistribution and Direct Taxes and Transfers in New Zealand’, by John Creedy, Jamas Enright, Norman Gemmell and Nick McNabb, identifies the characteristics of low-income taxpayers. The Policy Forum section includes four articles on ‘Reforming the Health System’: •

‘Taxation and Obesity?’ by John Freebairn. The author argues that a cautious approach and more evidence are needed in answering the question “should unhealthy food be taxed to reduce obesity?” — which is a recommendation of the National Preventative Health Taskforce report.

‘Medicare Select: A Bold Reform?’ by Jane Hall. The author argues that there are potential problems with Medicare Select’s proposed structure for a health system based on consumer choice of health plans and provider competition. Hall argues that efficiency gains are not clear and may take a long time to appear.

‘New Opportunities in Health Financing and Governance’ by James R. G. Butler. This article discusses whether the proposed reform for the Commonwealth to take over funding and control of public hospitals will lead to improved efficiency for the system, and the author asks, “how compatible is it with Medicare Select?”

‘Reforming the Health System: Paradise Lost?’ by Anthony Scott from the Melbourne Institute. The author states that there has been little microeconomic reform in the Australian health-care system, largely due to its complexity and the difficulty of applying simple market solutions to a sector with substantial market failure. Three major reports published in 2009 proposed wide-ranging reform of the health system, and represent the first opportunity for substantial structural reform since Medicare was established in 1984. Current reform proposals will be costly to implement but will have long-term pay-offs, especially for preventive health. They represent a substantial opportunity to enhance efficiency and equity.

In the For the Student section, Suresh Narayanan and Balasingam Vicknasingam have contributed an article entitled ‘Responses to the Illicit Drug Problem: Insights from Supply and Demand Analysis’. The authors evaluate the approaches generally being employed to fight the drug problem in Malaysia and Australia. The March issue also contains a survey article entitled ‘Patent Application Databases’ by Alfons Palangkaraya from the Melbourne Institute. The article reviews patent application databases from around the world and illustrates how they have been widely used in economic studies of innovation. More information on The Australian Economic Review can be found at <www.melbourneinstitute.com>.

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Recent 2010 Melbourne Institute Working Papers 1/10 ‘The Labour Market Effects of Vocational Education and Training in Australia’ Wang-Sheng Lee and Michael B. Coelli 2/10 ‘The Effects of Macroeconomic Conditions on the Education and Employment Outcomes of Youth’ Nicolas Hérault, Weiping Kostenko, Gary Marks and Rezida Zakirova Working Papers can be downloaded for free from <www.melbourneinstitute.com/publications/working/wp2010.cfm>. If you would like to receive an email notification when new Working Papers become available, contact the Melbourne Institute on <melb-inst@unimelb.edu.au>.

Faculty of Business and Economics On 22 February 2010 Her Excellency the Governor-General of Australia, Quentin Bryce, officially opened the University of Melbourne’s new Faculty of Business and Economics building at 198 Berkeley Street, Carlton. Professor Margaret Abernethy, Dean of the Faculty of Business and Economics, said that the celebration also heralded the Faculty’s new strategic direction to offer a world class business school offering undergraduate, graduate and executive education and to be recognised as a national and regional leader in business and economics education. Professor Abernethy added that the Faculty will build stronger domestic and international links through greater engagement with business, government and the wider community. Her Excellency the Governor-General of Australia, Quentin Bryce

Recent PhD Awarded Andreas Stierwald has been awarded a PhD from the University of Melbourne for completing his thesis on ‘Heterogeneity in Firm Performance: An Analysis of Large Australian Firms’. The findings show that substantial and persistent differences in performance across firms exist. These differences are predominantly due to unique and fundamental characteristics of the firm. Andreas joined the Industrial Economics research program at the Melbourne Institute as a Research Fellow on 1 March 2010. His work focuses on innovation-related issues, such as identifying the determinants of innovation and examining the effects of innovative activity on productivity and profitability at the firm level.

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: Cliff Howard tel: 03 8344 2154, fax: 03 8344 2111, email: howardc@unimelb.edu.au. Sub-Editor: Nellie Lentini. Contributors: Professor Ross Garnaut, Penny Hope, Associate Professor Paul Jensen, Professor Guay Lim, Professor Tony Scott, Dr Andreas Stierwald, Michelle Summerfield, Associate Professor Beth Webster, Associate Professor Roger Wilkins, Professor Mark Wooden.

Level 7, Alan Gilbert Building, The University of Melbourne P: +61 3 8344 2100 F: +61 3 8344 2111 www.melbourneinstitute.com

#27 March 2010 - Melbourne Institute News  

Issue 27 - March 2010 - Melbourne Institute News

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