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Melbourne Institute News September 2006 ISSN 1442-9500 (print)

ISSN 1442-9519 (online)

Print Post Approved PP381667/01204

Issue 13

Welfare Recipients Still Living in Poverty

Current Account Imbalances A recent working paper by Max Corden provides a sceptical view of current account imbalances. Page 2

Shoppers Say ‘No’ to Eco-Safe

Many Australians receiving government welfare benefits are still living below the poverty line, according to the latest issue of Poverty Lines: Australia. This is a long-standing publication produced by the Melbourne Institute of Applied Economic and Social Research. Figures for the March 2006 quarter, released in September, show that single adults on unemployment benefits fare worst, receiving around $77 per week less than the poverty line.

Demand for certified Australian-made and generic brands is high, but shoppers are shunning environmentally-friendly items. Page 5

Unemployed couples without children are living on around $28 per week less than the poverty line, while couples with children are receiving up to $31 less than the poverty line on a weekly basis.

Economic and Social Outlook Conference

Singles and couples on pensions, as well as single parents with children, are the only welfare recipients to rise above the poverty line.

Professor John Freebairn gives an overview of our upcoming conference, ‘Making the Boom Pay’, which will be held jointly with The Australian. Page 6

The figures given in the publication account for the maximum amount payable by Centrelink. They do not take into account non-cash benefits to which many recipients are entitled, including concessions for health and welfare, housing, transport, education and other goods and services. Poverty Lines is the longest running poverty index in Australia, having been produced since 1973. It is available for free download from the Melbourne Institute website at www.melbourneinstitute.com.

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Current Account Imbalances The international current account imbalances, where the United States has a vast deficit and several countries, notably Japan, China, Germany and the oil exporters, have corresponding surpluses, are usually seen as a problem. In his new working paper, Max Corden’s argument is that current account imbalances simply indicate intertemporal trade—the exchange of goods and services for claims. There are likely to be gains from trade of that kind as from ordinary trade. What then are the problems? Corden’s paper considers several scenarios for the future. In one, net savings of the surplus countries decline so that the world real interest rate rises. In a second scenario, the US fiscal deficit is reduced, so that the world real interest rate falls and there could be a worldwide aggregate demand problem, essentially caused by the high net savings of the surplus countries. A country that is running a current account deficit is selling financial claims of various kinds—bonds, equities and so on—in exchange for buying goods and services. In this paper, the term ‘bonds’ is used for claims of all kinds and ‘goods’ for goods and services of all kinds. A deficit country is selling bonds and buying goods. The bonds entitle the buyers to ‘goods tomorrow’.

globalisation—above all increased international capital mobility—has increased this type of trade. We know that even free trade can lead to problems, so that there may be something to investigate. Corden’s suggestion is that we should follow the approach usually practised in trade theory, and start with the presumption of the optimality of free trade, based on the theory of comparative advantage. Hence, a high level of intertemporal trade reflected in a high level of ‘current account imbalances’ may simply be one of the fruits of globalisation. Using the argument of the optimality of free trade as a starting point, one then looks for explicit qualifications, carefully analysing them. Perhaps the increase in trade is based on unwise decisions by various buyers and sellers (from the points of view of their own interests), or it is likely to be temporary (that is, it is not ‘sustainable’). And a reversal may involve costly adjustment problems. It is also possible that it has undesirable income distribution effects. Corden’s suggestion is that the normative theory of trade policy is also applicable to this subject of intertemporal trade.

Similarly, a country with a current account surplus is selling goods and buying bonds. A country normally engages in three kinds of trade: namely trade in goods (and services), which is analysed in standard trade theory; trade in claims of all kinds—that is, capital market trade, designed often to achieve portfolio balance, and this is also likely to involve an intertemporal element; and finally trade in financial assets in exchange for goods and services, which Corden calls intertemporal trade. He applies this concept to reflect on the much-discussed ‘current account imbalances’ issue.

International current account imbalances are not necessarily undesirable even when they are large for the same reason that trade is not undesirable. That should be the starting point of any analysis. There are gains from intertemporal trade. It is obvious, for example, in the case of the oil exporters that they should not necessarily increase either their domestic consumption or their investment sufficiently to avoid any increases in their current account surpluses. Even in the long run, it may be wise for them to invest some of their savings abroad. From their own point of view they should invest wherever the expected returns are highest, allowing for risk and desired liquidity. Similarly, the Chinese are not necessarily irrational in having a high savings propensity when the growth rate is so high, and for other reasons. Households in various developed countries, including the United States, may also be rational in responding to low real interest rates and ready credit with spending booms.

So why should an increase in the quantity of intertemporal trade be a problem? An increase in the current account deficit of the United States matched by increases in the current account surpluses of various other countries, notably Japan and China, is certainly perceived as a problem in various international discussions and in an extensive literature. Presumably there are gains from trade in this form of trade as in any other. Furthermore, it is not at all surprising that

In other words, what one observes in various countries, as described in detail in International Monetary Fund (2005, 2006), may reflect reasonably rational behaviour. Close knowledge of each case may, of course, lead one to different conclusions. In any case, the criterion of whether changes in private savings, investment or fiscal policy would lead to reduced current account imbalances is not an adequate guide to whether the changes are desirable.

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Yet there are four potential problems. These are not necessarily qualifications to the ‘gains from trade’ argument. But they may qualify the view that there is nothing to worry about. The first is the ‘Keynesian problem’ which could arise if the savings glut continued or even intensified while US fiscal policy became significantly contractionary relative to its current level. For this eventuality, fiscal policies not just in the United States, but also elsewhere, notably in Europe, should be flexible. The second potential problem, much emphasised in the literature, is that the value of the dollar might fall sharply in expectation of the likelihood of a reversal of the current situation. A sharp sudden fall in the dollar could have a variety of adverse effects outweighing its favourable effects. Sudden changes in whatever direction usually create problems somewhere, though it is certainly not inevitable that a decline in the dollar would be sudden and disruptive. The third possible problem (the opposite of the first) is that the savings glut may in due course contract, causing world interest rates to rise and so leading to housing market or stock market crashes, and generally difficulties for borrowers, and especially the US government.

These are all potential short- or medium-term effects. The fourth problem, which is essentially long run, is that some big borrowers, notably the US government as well as some private borrowers, may eventually find it difficult to meet their debt service obligations. This has been discussed fully in Cline (2005), and relates to two issues: first, whether investment in the United States is adequate; and second, whether the US political system is capable of increasing tax rates required to fulfill various future obligations. The full working paper, entitled ‘Those Current Account Imbalances: A Sceptical View’, is available for free download from www.melbourneinstitute.com. References Cline, W. R. (2005), The United States as a Debtor Nation (Washington DC, Institute for International Economics and Center for Global Development). International Monetary Fund (2005), World Economic Outlook September 2005 (Washington DC). International Monetary Fund (2006), World Economic Outlook April 2006 (Washington DC).

Labour Supply and Microsimulation Associate Professor Guyonne Kalb and Professor John Creedy have recently published a book entitled Labour Supply and Microsimulation: The Evaluation of Tax Policy Reforms. This book provides a detailed introduction to behavioural tax microsimulation methods and reviews the use of such models for evaluating tax policy reforms. The steps required to construct a microsimulation model are described in detail and methods of evaluating policy changes are then presented. Labour Supply and Microsimulation deals with a number of issues related to interpreting results from microsimulation, such as welfare measurement, income distribution, confidence

intervals around the simulated results, and feedback effects on the wage distribution via labour demand. All of the approaches and proposed methods are general and not model-specific. The book includes detailed descriptions of how labour supply models can be used in building behavioural microsimulation models as well as the development of new methods for evaluating policy reforms; for example, dealing with income distribution in discrete hours models, measuring welfare changes and constructing confidence intervals. Further information is available through the publisher at www.e-elgar.co.uk. You can also purchase copies of the book through the Edward Elgar Publishing website.

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Melbourne Institute Wages Report Young workers, those on enterprise agreements, males and full-time employees report the largest average pay rises, according to the Melbourne Institute of Applied Economic and Social Research. Figures released in the August Melbourne Institute Wages Report show that the total pay indicator growth rate is lower in August, with figures falling to 2.7 per cent per year. The majority of respondents reported increases in their total pays. 65.4 per cent of respondents reported an increase in their total pay in the last three months.

It was found that, in general, more workers on enterprise agreements reported a change in basic hourly wage rates and in total pay in August than workers on other work arrangements. Those on individual contracts, however, recorded bigger average rises than those on enterprise agreements or award rates. Workers between the ages of 18 and 24 recorded the largest average increases in both basic hourly wage rates and total pay of the four age groups studied. 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 recent data, collected one week prior to the release of the report.

Australian Economic Review The September issue of the Australian Economic Review contains a range of interesting articles, particularly in relation to the current situations of the Australian workforce. Contributed Articles An Evaluation of Unemployment Policy in Australia Using the Range of Equilibria, Jenny N. Lye and Ian M. McDonald Instrument Insufficiency and Economic Stabilisation, Roger J. Bowden Evaluation of Policy Options to Encourage Welfare to Work, Hielke Buddelmeyer, John Freebairn and Guyonne Kalb Income Growth and Earnings Variations in New Zealand, 1998–2004, Dean Hyslop and Suresh Yahanpath

Policy Forum: Australia’s Health Workforce The Productivity of the Health Workforce, Anthony Scott Next Steps in Health Workforce Reform, Stephen J. Duckett Medical Workforce Planning: Some Forecasting Challenges, Alan Maynard Data Surveys A Time Series for Business Profitability in TwentiethCentury Australia, Simon Ville and David Merrett For the Student How to Calculate Welfare Measures Using Only Marshallian Demand Functions, John Creedy The Australian Economic Review can be subscribed to online at www.blackwellpublishing.com/aere.

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Shoppers Say ‘No’ to Eco-Safe ‘This enabled us to assess how characteristics such as labelling, market power and consumer loyalty affect product demand.’

Demand for certified Australianmade and generic or ‘home-brand’ groceries is high, but shoppers are shunning environmentally-friendly items, according to a recent study at the Melbourne Institute of Applied Economic and Social Research.

He said the research confirmed economic logic that market power affects product demand, but also showed that firms can control product demand through brand differentiation strategies.

Dr Paul Jensen and Associate Professor Elizabeth Webster analysed 92 products across 12 broad categories, on which Australian consumers spent an average of almost $200 million each month during the period 2002 to 2005. Selected products were staple items including bread, laundry liquids, tomato sauce and milk, and were taken from major Australian supermarkets such as Coles and Woolworths chains. The researchers used monthly data from ACNielsen on price and sale volumes, as well as hand-collected data on packets, tins and jars to examine the effects of brand characteristics—such as environmentally-friendly, generic label, Australian-made or health conscious—on demand. Dr Jensen said the products had few differences in quality across brands.

‘We were surprised by some characteristics that were significant, such as the popularity of generic labels and the lack of support for environmentally-friendly goods. ‘Australia has lagged behind the UK and US in the penetration of generic brands, but our research suggests awareness of their value may be growing.’ Results showed that brands attempting to piggyback on the Australian-made trend with a non-certified Australiana insignia suffered lower demand. They also looked at brand ages, finding that older brands were in higher demand ‘signalling the positive effects of brand loyalty on demand’. The working paper, written by Dr Paul Jensen and Associate Professor Beth Webster, is entitled ‘Market Power, Brand Characteristics and Demand for Retail Grocery Products’ and is available for free downloading at www.melbourneinstitute.com.

Melbourne Institute Economics Forums September Forums

November Forum

Forums held in Melbourne (19 September) and Canberra (21 September) focused on the application of longitudinal data from the HILDA Survey to assess the year-to-year transitions of household incomes, employee preferences for hours of work and actual hours worked, and household uses of social security payments. Summaries of the presentations by Professor Mark Wooden and Associate Professor Bruce Headey of the Melbourne Institute, and by Mr David Hazelhurst of the Department of Families, Community Services and Indigenous Affairs, along with the Melbourne Institute’s macroeconomic forecasts presented by Associate Professor Mark Crosby, are available from www.melbourneinstitute.com.

On Tuesday 21 November, the fourth Public Economics Forum for 2006 will be held in Canberra from 12 noon to 1.45 pm. The special topic will be ‘Labour Force Skills’. Registration forms can be accessed from www.melbourneinstitute.com.

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Economic and Social Outlook Conference by John Freebairn

On 2–3 November, a conference titled ‘Making the Boom Pay: Securing the Next Generation of Prosperity’ will be held at the University of Melbourne. This is the fourth Economic and Social Outlook Conference jointly organised by the Melbourne Institute and The Australian. Drawing on the expertise of political leaders, representatives of business and not-for-profit organisations, senior public servants and academics across a range of disciplines, the focus of the conference will be on the policy challenges and options facing Australia over the next decade. After two decades of a reform program that has transformed the Australian economy, the Lucky Country currently finds itself blessed by a China-driven resources boom. Previous such booms have ended in tears. How can we manage the boom properly? What policies and strategies should Australia adopt to set itself up for continued opportunity and prosperity? In the process, how might we best tackle areas of entrenched disadvantage? What are the pros and cons of different options for confronting the longer term challenges associated with increased pressures on natural resources and the ageing of the population? How can we use the fruits of prosperity to best invest in education and training to provide skills for the future Australian workforce in an evolving global economy and at the same time provide for equality of opportunity? The opening sessions will provide a review of where the Australian economy is now, then delve into likely developments over the next decade, and suggest policy options for the future. Paul Kelly of The Australian, Chris Richardson of Access Economics, Ross Garnaut and Bob Gregory, both from the ANU, and Craig Emerson

MP will lead the discussion on such topics as commodity booms, likely trends in the global economy, including China and India, technical and workplace changes, demographic change, and the roles for and options of Australian macroeconomic and microeconomic policies as they affect the sustainability of economic growth for different segments of the economy and for the whole economy. Important issues of equity and redistribution will be considered by Bruce Headey of the Melbourne Institute, Ann Harding of NATSEM, and Michael Raper from the Welfare Rights Centre. Katie Lahey of the Business Council of Australia and Gary Banks from the Productivity Commission will address the challenging issue of the options for federal– state relations in the future. Three sets of concurrent sessions will address in more detail and depth specific policy topics. One of these sets of topics will be education and training, with sessions on ‘Pre-school and School’ (with the Honourable Lynne Kosky MP, Fiona Stanley of the Australian Research Alliance for Children and Youth, and Barry McGaw of the University of Melbourne), and the ‘University Sector in the Next Decade’ (with Glyn Davis of the University of Melbourne, the Honourable Julie Bishop MP and Jenny Macklin MP). A second set of topics will consider energy and the environment with specific topics of ‘Powering the Boom’ (Alan Moran of the Institute of Public Affairs, Martin Sevior of the University of Melbourne, and Don Henry of the Australian Conservation Foundation), ‘Water Policy Challenges and Options’ (the Honourable Malcolm Turnbull MP, Neil Byron of the Productivity Commission, and Mike Young of the CSIRO), and ‘Urban Congestion’ (Graham

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University of New South Wales, and John Freebairn of the Melbourne Institute).

Evans of the Victorian Competition and Efficiency Commission, Harry Clarke of La Trobe University, and Kevin O’Connor of the University of Melbourne). A third set of topics will concentrate on welfare and social policy. Particular sessions will be on ‘Participation, Childcare and Welfare Reform’ (Guyonne Kalb of the Melbourne Institute, the Honourable Sharman Stone MP, and Pru Goward of the Human Rights and Equal Opportunity Commission), ‘Caring for the Aged’ (Susan Linacre of ABS, Senator Santo Santoro, and Warren Hogan of the University of Technology Sydney), the ‘New Health Reform Agenda’ (the Honourable Tony Abbott MP, Julia Gillard MP, and Tony Scott of the Melbourne Institute), and ‘Social Policy in Action’ (Andrew Johnson of ACOSS, Raymattja Marika of Reconciliation Australia, and Shelley Reys of ArrillaIndigenous Consultants and Services). Other special sessions will discuss ‘How the New Workplace System is Faring’ (Ian Harper of the Australian Fair Pay Commission, Angela Robertson of Holden Ltd, and a representative from the ACTU) and the ‘Next Wave of Tax Reform’ (Wayne Swan MP, Neil Warren of the

A feature of the conference will be the speakers at the Gala Dinner on the Thursday evening and at the Thursday lunch and Friday lunch: namely Dr Ken Henry, Secretary, Commonwealth Department of the Treasury; Brian Fisher, former Director of ABARE; and the Leader of the Opposition, the Honourable Kim Beazley MP, respectively. A plenary session on ‘Road Blocks to Prosperity’ will conclude the conference. Peter Boxall, Secretary, Commonwealth Department of Employment and Workplace Relations, will discuss the topic of workplace skills, and Rod Sims of Port Jackson Partners will open discussion on the provision of infrastructure. In all sessions there will be opportunities for audience participation. For further details on the conference program and for a copy of the registration form, please see the Melbourne Institute website at www.melbourneinstitute.com.

The Management of Intellectual Property Edited by Derek Bosworth, Emeritus Professor, University of Manchester and Senior Research Associate, Oxford Intellectual Property Research Centre, St Peter’s College, Oxford, UK, and Elizabeth Webster, Principal Research Fellow, Intellectual Property Research Institute of Australia and Melbourne Institute of Applied Economic and Social Research, The University of Melbourne, Australia. This book brings together innovative contributions on the management of intellectual property (IP) and IP rights by an esteemed and multi-disciplinary group of

economists, management scientists, accountants and lawyers. Offering a broad and enlightening picture of the measurement and management of IP, the contributors argue that the shift towards a knowledge-based economy has increased the importance of IP and, more generally, intangible assets as a focus for company decision-making behaviour. The book explores these intangible assets, which are driven by investments in R&D, marketing, education and training, management information systems and organisational structure. The inherent risk in the development of such assets—born from the involvement of creativity and innovation—is also discussed. You can order The Management of Intellectual Property through our website. For further information, please contact Michelle Wilson on 03 8344 2100.

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Recent Melbourne Institute Working Papers September 2006, ‘Who Wants Flexibility? Changing Work Hours Preferences and Life Events’, 19/06, Robert Drago, Mark Wooden and David Black. August 2006, ‘Disability Support Pension Recipients: Who Gets Off (and Stays Off) Payments?’, 18/06, Lixin Cai, Ha Vu and Roger Wilkins. August 2006, ‘The Comovement between Fuel Prices and the General Price Level in Australia’, 17/06, Lei Lei Song. July 2006, ‘Personal and Job Characteristics Associated with Underemployment’, 16/06, Roger Wilkins. July 2006, ‘Innovation and the Determinants of Firm Survival’, 15/06, Hielke Buddelmeyer, Paul H. Jensen and Elizabeth Webster. July 2006, ‘Beveridge-Nelson Decomposition with Markov Switching’, 14/06, Chin Nam Low, Heather Anderson and Ralph Snyder. Working papers can be downloaded for free from www.melbourneinstitute.com.

Some Recent Staff Successes Chancellor’s Prize for Excellence The Melbourne Institute and its staff wish to congratulate Dr Penny Smith, who was recently awarded the Chancellor’s Prize for excellence in the PhD thesis (in the Social Sciences), which she passed in 2005. This is a fine achievement. Penny joined the Melbourne Institute as a PhD candidate in December 1999 after completing a Master of Commerce degree at the University of Melbourne. While working towards her PhD, Penny also worked as a Research Officer at the Melbourne Institute. Since completing her PhD, she has been promoted to Research Fellow. ARC Linkage Grant Professor Tony Scott and Associate Professor Guyonne Kalb recently had success with an ARC Linkage Grant for ‘Economic Modelling of the Nurses’ Labour Market in Australia’. The linkage partner is the Department of Human Services, and the ARC funded amount is $410,239 which is totalled over the period 2007–2009.

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: Professor Max Corden, Professor John Freebairn, Dr Paul Jensen, Associate Professor Guyonne Kalb.

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


#13 September 2006 - Melbourne Institute News