ISSN 1442-9519 Print Post Approved PP381667/01204 Issue 2 June 2000

Melbourne Institute of Applied Economic and Social ResearchThe University of Melbourne, Victoria 3010 AustraliaPhone: +61 3 8344 5330 Fax: +61 3 8344 5630 Email: melb.inst@iaesr.unimelb.edu.auWWW: http://www.ecom.unimelb.edu.au/iaesrwww/home.html

2000 The University of Melbourne, Melbourne Institute of Applied Economic nd Soci l Rese rch

News Melbourne Institute

The Melbourne Institute’s Director, PeterDawkins, was appointed to the CommonwealthGovernment’s Reference Group on Welfare Re-form in October 1998.

The task of the Reference Group is to assist inthe development of a comprehensive GreenPaper on Welfare Reform, with the interim re-port published in March this year and a final re-port due by July. The Reference Group is headedby Mr Patrick McClure, Chief Executive of Mis-sion Australia, and includes representativesfrom the community, the welfare sector, busi-ness, academia and government.

In establishing this Reference Group, the Gov-ernment aimed to define ways of assisting disad-vantaged people so as to strike a better balancebetween the Government’s ongoing commitmentto maintaining a strong safety net, and its re-sponsibility to develop policies and strategieswhich allow all Australians to participate as fullyas possible in the workforce.

In addition to Peter Dawkins’ own contribu-tion to the review, the Melbourne Institute hashosted two seminars at the University of Mel-bourne on behalf of the Reference Group, one inFebruary and one in May, which brought to-gether leading academics and experts from gov-ernment and the welfare sector. The purpose ofthese meetings was to enable discussion of theissues and for the Reference Group to gleaninput from and bounce ideas off the relevant ex-

perts in the debate. Both seminars proved veryproductive and have provided a significant con-tribution to the interim and final reports.

In March, the interim report of the ReferenceGroup, entitled

Participation Support for aMore Equitable Society

, outlined its vision forthe future thus: ‘the nation’s social support sys-tem must be judged by its capacity to help peopleaccess opportunities for economic and socialparticipation, as well as by the adequacy of its in-come support arrangements’.

Five key features of the proposed system are: • individualised service delivery (focused on

meeting the needs of the individual andhelping them achieve their goals);

• a simpler income support structure that ismore responsive to individual needs, cir-cumstances and aspirations;

• incentives and targeted assistance to en-courage and enable participation;

• social partnerships (governments, businessand communities all have a role); and

• mutual obligations (income recipientswould be expected to make the most of op-portunities provided).

The release of this report elicited substantialmedia coverage and debate, and a number ofconcerns have been raised. In general thereseemed to be a recognition that the present ar-rangements are unsatisfactory and unsustaina-ble, and that the thrust of the recommendations,

towards greater economic and social participa-tion for all meanwhile ensuring the adequacy ofincome support, is desirable. One concern sur-rounds the implementation and cost of estab-lishing such a system. The final report isexpected to shed further light on these matters.

The Melbourne Institute also facilitated de-bate on the report and these issues at its quar-terly forums in April: the interim report’sfindings were the special topic of discussion atboth the

Business Economics Forum

in Mel-bourne on 6 April and the

Public EconomicsForum

in Canberra on 11 April.

Melbourne Institute Participates in Welfare Review Process

★★★ Highlights ★★★• Professorial Fellow Mark Wooden

appointed to Melbourne Institute. See page 3

• Professor Ross Garnaut on sabbatical at the Melbourne Institute. See page 3

• Major social policy research contract under negotiation. See page 4

• Melbourne Institute forecasts continued strong growth in Australian economy. See page 5

From left: Professor Peter Dawkins, Ms Elizabeth Morgan, Mr Mark Paterson, Mr Ted Evans, Mr Michael Raper and Mr Patrick McClure at the Melbourne Institute Public Economics Forum in Canberra, 11 April 2000

Forthcoming Events

•

Conference on

‘Modelling the Incentive Effects of Reforms to Tax and Social Security’,

28 August 2000 (date to be confirmed), to be held in Canberra

•

Melbourne Institute Public Economics Forum

in Canberra, 6 October 2000 (Special Topic: Industrial Relations Reform)

•

Melbourne Institute Business Economics Forum

, 13 October 2000 (Special Topic: Industrial Relations Reform)

•

Conference on

‘Welfare Reform: Where to from Here?’

, 8

November 2000 (date to be confirmed)

Phot

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Tys

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2

‘Hard Heads, Soft Hearts’ or ‘Cool Heads, Warm Hearts’?

In our last newsletter I explained the origin ofthe Melbourne Institute’s motto ‘Hard Heads,Soft Hearts’, referring to a book by US economistAlan Blinder and, much earlier in the history ofeconomics, to the famous nineteenth centuryeconomist Alfred Marshall.

Professor Joe Isaac has kindly traced the ref-erence to Alfred Marshall. John Maynard Keynes,in his

Essays in Biography

,

quoted Marshall onthis subject. It turns out, however, that Marshallused the term ‘cool heads, warm hearts’. I thinkwe will stick with our existing motto, and con-tinue to refer to Marshall as one of its origina-tors. But I like ‘cool heads, warm hearts’ as well.Thanks for pointing this out Joe.

The Welfare Review

In the early 1970s, the Inaugural Director of theMelbourne Institute, Ronald Henderson, was re-sponsible for a Royal Commission of Inquiry intoPoverty. Henderson’s work, both before the in-quiry, and in the inquiry itself, was very impor-tant in pointing out that poverty was a significantissue in Australia, despite the establishment of awelfare state in the post-war period.

With this heightened awareness of the prob-lem of poverty, in the mid 1970s the Australiangovernment made significant steps in increasingboth unemployment benefits and aged pensionsto reduce the amount of poverty.

From that time on, however, the welfare sys-tem has been battling to deal with a growingnumber of challenges. First, unemployment hadbeen very low until the mid 1970s, but this situ-ation subsequently changed. Second, the typicalhousehold had one breadwinner who was male.Since that time, however, there has been a grow-ing diversity of working arrangements andhousehold compositions. Female labour forceparticipation has grown strongly, as has part-time employment. Social and demographictrends have also led to growth in the number oflone parents and in the number of people claim-ing disability support. Families have also neededto support their children for more and moreyears as education participation has increased.

Further, the major challenge we see is to ad-dress the problem of the widening distributionof work, rather than the distribution of incomeper se. This is a different challenge from the oneidentified by Henderson back in the early 1970s.As I outlined in my inaugural lecture in 1996, in

the last twenty-five years there has been a stronggrowth in the proportion of households with noworkers alongside a strong growth in the pro-portion of households with two or more em-ployed persons.

In this increasingly challenging world, suc-cessive governments have increased the scope ofthe welfare safety net, while at the same timeseeking to maintain a high degree of cost effec-tiveness by attaching a means test to each of thevarious benefits. The result has been a highlycomplex system that is very difficult for eco-nomic and social researchers, let alone benefitrecipients, to understand. As a result the effect ofany single policy change is hard to predict andmay be counter-productive.

This complexity of the income support systemand some of the associated disincentives to workresulting from high effective marginal tax ratesare two of the problems identified in the interimreport of the Reference Group on Welfare Re-form (of which I am a member) which was re-leased in March.

As a result, two of the five features that theReference Group believes should characterise areoriented ‘participation support system’ aregreater simplicity of the income support systemand stronger work incentives. The other threefeatures are individualised service delivery, so-cial partnerships, and mutual obligations. Weare strongly of the view that a successful systemrequires all five of these features working to-gether.

We see this as a major reorientation of thewelfare system that could take a decade to im-plement. The challenge for our final report,which is due by July, is to provide enough detailof how to commence on the reform process andwhat we should be aiming for in the long run,while allowing further research, policy trials andongoing policy experience to enable the reformprocess to adapt as it proceeds.

Economic Outlook

We are currently in a much stronger position toimplement welfare reform than we would havebeen just after the last recession. The long recov-ery has substantially reduced the unemploymentrate and raised the job prospects of job seekers.Further, our ability to shift more and more peo-ple on welfare benefits into the labour marketwill be strongly influenced by the economic out-look. Some commentators are beginning to saythat the economic outlook is softening signifi-cantly. The macroeconomic forecasters in the

Melbourne Institute, however, remain positiveabout the outlook for the next two years. Thereis more about this on page 5, and about the Mel-bourne Institute’s forecasting model which hasperformed well since it was launched in 1997.

News on Projects, Personnel and Events

In 2000 we are organising our research projectsinto three program areas:

• Labour, Social and Fiscal Studies• Business Cycles and Forecasting • Enterprise Performance

We have therefore organised our project news inthis newsletter under these three headings.

In pursuing these research areas we havemade some new appointments which are re-ported on the next page. One of the new appoint-ees, Professor Mark Wooden, will be giving hisinaugural lecture in early August. We will be de-lighted to see as many of you who are able to bein Melbourne on that day at that event. We alsohave a number of forums and conferences inMelbourne and Canberra over the next fewmonths that are listed on page 7.

One of these events will be a conference inearly November on welfare reform. That shouldgive participants plenty of time to absorb theideas in the final report of the Reference Groupon Welfare Reform, which will be a major focusof mine over the next few weeks.

2 June 2000

Hard Heads, Soft Hearts: Director’s Letter

Professor Peter DawkinsRonald Henderson Professor and Director

3

New Professor Appointed

The Melbourne In-stitute was pleasedto welcome MarkWooden as a Pro-fessorial ResearchFellow with the In-stitute in March.Mark was previ-ously Professor andActing Director atthe National In-stitute of LabourStudies at FlindersUniversity, where

he was employed for 19 years. In that time he de-veloped an impressive track record in both re-search and consulting.

On the research side, Mark is the author offour books, 16 chapters in edited books, andover 80 published journal articles, includingmany leading journals in Australia and overseas.He is now widely acknowledged as one of Aus-tralia’s leading commentators on labour marketdevelopments and trends. He has also preparedcountless reports for a vast array of governmentand private sector organisations on an evenwider range of issues.

Mark’s main area of research interest hasbeen the operation of labour markets in Aus-tralia and, in particular, how they are affected byinstitutions. Recent research has been con-cerned with the changing nature of work; the na-ture and implications of changing industrialrelations arrangements; workforce ageing andtraining; and the determinants of earnings.

Mark will be involved in a range of projects atthe Melbourne Institute. In the short term he willbe in charge of coordinating the Enterprise Per-formance research program. In the more me-dium term, Mark is likely to head a researchteam which will engage in studies of the labourmarket and its interaction with the social secu-rity system; this will form part of the researchcontract under final negotiation with the Depart-ment of Family and Community Services (seepage 4).

Inaugural Lecture by Mark Wooden

Newly appointed Professorial Fellow MarkWooden will present his inaugural lecture on

Industrial Relations

Reform in Australia:Causes, Consequences and Prospects

at6.30pm on 14 August 2000 in the Trikojus Lec-

ture Theatre, Biochemistry Building at the Uni-versity of Melbourne.

Ross Garnaut on Sabbatical at the Melbourne Institute

Professor Ross Garnaut of the Australian Na-tional University is currently on sabbatical at theMelbourne Institute. He is working on a bookwhich will examine the way in which the Austral-ian economy has adapted to changes in the inter-national environment and to changes inAustralian international economic policy overthe past century, as well as the unfinished Aus-tralian economic policy agenda. It will discussthe extent to which the growth of economic rela-tions with Asia and the opening of the Australianeconomy late in the twentieth century have pre-sented challenges and opportunities for the re-turn to full employment in Australia. The bookwill examine the role of reform of the wage andwelfare systems in a set of policies for full em-ployment in an open Australian economy.

Ross Garnaut is Professor of Economics at theANU. He was head of the Economics Division ofthe Research School of Pacific and Asian Studiesfrom 1989 to 1999 and Foundation Director ofthe Asia Pacific School of Economics and Man-agement. He was Ambassador to China, and theauthor of the ‘Garnaut Report’ on Australia’s re-lationship with Northeast Asia. He was also oneof the five economists, alongside Peter Dawkins,John Freebairn, Michael Keating and Chris Rich-ardson, who proposed the ‘five economists plan’aimed at substantially reducing unemploymentin a letter to the Prime Minister in October 1998.

He will present two seminars at the MelbourneInstitute in the coming weeks. One will take placeon 19 June and the other on 18 July. For moreinformation contact Rachel Derham on (03)8344 5325; also see page 7 of this newsletter.

Two ‘Adjunct’ Appointments

We are pleased to announce that Professor JohnFreebairn, head of the Department of Economicsin our faculty at the University of Melbourne, hasbeen appointed as an Adjunct Professor of theMelbourne Institute. John was Director of theFull Employment Project which was based in theInstitute between 1996 and 1998 and is now co-ordinating the project on Unemployment: Mod-elling and Policy Analysis, outlined on page 4.

We are also pleased that Professor BruceChapman has accepted an adjunct appointmentas a Professorial Fellow with the Institute. He willvisit to present seminars from time to time andwill contribute to our research agenda in laboureconomics.

Research Officer Appointment

The Melbourne Institute is pleased to announcethe appointment of Matt Hammill as a ResearchOfficer. Matt has a first class honours degreefrom the University of Melbourne and was in-volved in the production of the recently pub-lished Melbourne Institute report

Monitoringthe GST

.

The 2000 Melbourne Institute Advisory Board

The Melbourne Institute Advisory Board for theyear 2000 includes the following pre-existingmembers:

Dr Peter Jonson,

Ernst and Young

(Chairman)

Ms Stella Axarlis, Managing Director,

Bilcon Engineering

Mr Gary Banks, Chairman,

Productivity Commission

Mr Tony Cole, Principal – National Practice Leader, Investment Consulting,

William M. Mercer

Mr Michael Costa, Secretary,

Labor Council of NSW

Professor Peter Dawkins, Director and Ronald Henderson Professor,

Melbourne Institute

Mr Bill Evans, General Manager, Economics,

Westpac Banking Corporation

Professor John Freebairn, Head,

Department of Economics,

The University of Melbourne

News on Staff, Visitors and the Advisory Board

Professor Mark Wooden

Professor Ross GarnautVisitor

(continued page 7)

4

Social Policy Research

We are pleased to report that the Melbourne In-stitute has been selected as one of the preferredtenderers for the provision of social policy re-search to the Department of Family and Commu-nity Services (FaCS), for the period 2001–2004.We are currently negotiating a contract, which isexpected to involve funding from FaCS of theorder of $750,000 per year, over this period.

Three teams are to be put in place in the fol-lowing areas:

• Empirical Studies of the Interaction of theLabour Market and the Social Security Sys-tem (led by Mark Wooden)

• The Supply and Demand for Income Secu-rity: Behavioural Policy Modelling (led byJohn Creedy)

• Economic and Social Research on Familiesand Communities (led by David Johnson)

MITTS Model to be Launched in August

During the last two years, led by John Creedy andAlan Duncan, the Melbourne Institute has devel-oped a behavioural model of the Australian Taxand Social Security System. It incorporates la-bour supply responses to changes in taxes or so-cial security benefits. It is named the MelbourneInstitute Tax and Transfer Simulator (MITTS)and will be launched at a half day conference inCanberra on 28 August (provisional date). Theconference is entitled ‘Modelling the IncentiveEffects of Reforms to Tax and Social Security’.

Modelling Unemployment

The Melbourne Institute has been successful inobtaining an Australian Research Council‘SPIRT’ Grant, for research on

Unemployment:Modelling and Policy Analysis

. The first stage ofthe project has been to review the structure andfindings of previous unemployment modelling. A

compendium of review papers will be releasedat the end of this review. The aim of the projectis to fill important gaps in the literature and inthe capacity of economic modelling in Australiato simulate the effect of possible policies aimedat substantially reducing unemployment.

Analysing FaCS Data Base

Over the last two years a number of researchersat the Melbourne Institute have been analysingthe Department of Family and Community Serv-ices longitudinal administrative data base, to ex-amine such questions as:

• Can we find evidence of incentive effects ofthe tax and social security system?

• How prevalent are repeated spells on bene-fits in the experience of benefit recipients?

Papers resulting from this research were pre-sented at a conference in Canberra in April and,following some revisions, are expected to bepublished in the second half of the year.

Labour Market Programs and Wage Inflation

One explanation for concurrent levels of highunemployment and inflation during the 1980sand early 1990s was the high incidence of long-term unemployment. It has been argued that em-ployers regard the long-term unemployed as de-skilled and accordingly not as viable alternativesto more experienced workers. Therefore theybecome more likely to grant the latter pay in-creases rather than hire more workers whenunder pressure from demand or supply. Labourmarket programs are recommended as policiesto reverse this de-skilling effect. If employerscome to consider the unemployed as substitutesfor their incumbent workforce they will be lessinclined voluntarily to grant wage increases. Ourresearch has attempted to test whether the suiteof

Working Nation

labour market programs af-fected Australian wage inflation between 1989and 1997 by applying pooled cross-sectionaltime series data to a general bargaining model.We find that a doubling of labour market pro-gram participants per employee leads, at most,to a 1 per cent reduction in nominal wages.

Feedback from Employers of University of Melbourne Graduates

Recently the Melbourne Institute surveyed over250 employers of University of Melbourne grad-

uates on the performance of the graduates andtheir contribution to the employing organisa-tion. Overall, employers ranked interpersonalskills, ability to work as a team member, self-motivation and initiative as the most importantattributes. All attributes were rated higher in im-portance than in a similar survey undertaken in1997–98. Graduates best demonstrated the at-tributes of energy, drive and enthusiasm, de-pendability and reliability, and ability to work asa team member. These mean scores were simi-lar to those obtained from the 1997–98 survey.

International Reform Monitor

The Melbourne Institute is the Australian partnerin an international forum for the discussion ofinteresting and current reforms in the fields ofsocial policy, labour market policy and indus-trial relations. The forum is run by the Bertels-mann Foundation and provides the opportunityfor international comparisons of experience andknowledge in social policy.

There are fifteen members of the forum, allfrom developed countries in Western Europeand the Pacific rim. Each country details currentreforms in the areas above twice a year. The re-forms are compiled into a non-technical mono-graph aimed at a broad audience of policymakers, academics, public servants, businesspeople and other interested persons. The publi-cation is distributed within the member coun-tries and is also available on the web atwww.reform-monitor.org.

The group meets each year in Germany to dis-cuss the development of the project and topresent findings on particular issues. DavidJohnson has recently returned from the year2000 meeting which was held in Berlin. Davidreports that this year’s meeting focused on pro-visions for retirement.

Ageing of populations and generous andsometimes unfunded existing retirement ar-rangements in some countries has led to greatconcern about the viability of many existingschemes. David noted that compared to some ofthe forum member countries Australia was in arelatively fortunate position. Australia’s provi-sions are robust, being designed around threepillars: a universal public pension scheme; acompulsory private superannuation top-up; andvoluntary private superannuation schemes. Inaddition, pressure on funding arising from age-ing is less intense in Australia with its (relatively)younger population. Nevertheless arrangementsrequire continuing monitoring.

Labour, Social and Fiscal Studies

Research Fellow Ms Rosanna Scutella working on the MITTS model

5

Our Reading of the Economy

What an interesting and challenging time formacroeconomists this is! In November 1999 theReserve Bank began to tighten monetary policyfor the first time since 1994, creating near hys-teria among politicians and the media. Our view,expressed in

the

Mercer – Melbourne InstituteQuarterly Bulletin of Economic Trends 2.00

, isthat the 1.25 percentage points rise in the cashrate so far is insufficient to contain incipient in-flation. Thus we believe the Bank will ultimatelyhave to tighten by a further three-quarters of apercentage point. Even with this additional in-crease however, the recent round of tighteningwould be modest and gradual. As a point of com-parison, between August and December 1994the Reserve Bank raised rates by 2.75 per cent.

Uncertainty surrounding the new tax systemprobably means that the Reserve Bank will waituntil the last quarter of this year before tighten-ing further. Our analysis in the

Quarterly Bulle-tin

suggests that many of our most reliableindicators are already exhibiting GST-relatedturbulence, with more yet to come. Our advicefor reading the economy is to focus on employ-ment and unemployment, as these indicators areless susceptible to GST-related gyrations.

Our view is that the economy will remainstrong through the new tax system’s transitionalperiod. Indeed, rather than seeing a slowdownwe expect that the forthcoming fiscal stimuluswill cause an acceleration of growth in the sec-ond part of this year. We acknowledge that thisis not a widely held view.

Forecasting Model Performed Well over the Asia Crisis

One reason for being quietly confident about ourforecasts is that the model on which they arebased performed so well throughout the Asian

crisis. A brief evaluation of the model is con-tained in

Quarterly Bulletin 2.00

. Peter Sum-mers will present a paper on ‘ForecastingAustralia’s Economic Performance during theAsian Crisis’ at the International Forecasting So-ciety (IFS) conference in Lisbon, Portugal, on 20–25 June. He recently visited the research de-partment of the Federal Reserve Bank of Atlanta,bringing back a number of tools to improve themodel and the presentation of results.

Household Survey Provides Useful Insights in Time of Turbulence

The Melbourne Institute’s monthly survey ofhouseholds has proved particularly useful in thetransitional period surrounding the new tax sys-tem. In the lead up to the 1 July start date con-sumer confidence has fallen sharply, from anindex reading of 114.5 in May 1999 to 93.7 inMay 2000. During the same period median ex-pectations for inflation increased from 4.8 percent in May 1999 to 8.2 per cent in May 2000.Households are asked to report what ‘news’ theyhave heard and whether that news is favourableor unfavourable. Reports of ‘news heard’ abouttax and interest rates have been particularly un-favourable, largely reflecting the media treat-ment of these two issues.

Eleven questions about the new tax systemwere included in our April 2000 household sur-vey. A brief summary of households’ responsesis that they are confused about the personal andnational implications of the new tax system. Ingeneral consumers overestimate the likely pricerises attributable to the GST and underestimatethe extent of compensation they will receivethrough tax cuts and benefit increases. More de-tail is available in the Melbourne Institute report

Monitoring the GST

. The first update to

Moni-toring the GST

will be available on 15 June andwill report on data collected in the May survey.

Our view is that the period from July to Sep-tember will see a potentially large turnaround inconsumer sentiment. Three factors will be atwork here. First, people will find that the GST-related price increases are not as large as theypreviously thought. Second, they will find thatthey have more in their pocket from tax cuts andbenefit increases. Third, the lead up to and stag-ing of the Olympics should improve sentiment.

Business Economics Forum

In addition to the changes outlined above, sub-stantial discussion about welfare reform and fur-

ther industrial relations reform is underway.Both of these issues potentially have importantmacroeconomic consequences.

At the first Melbourne Institute Business Eco-nomics Forum breakfast briefing for 2000, PeterDawkins and Elizabeth Morgan reported on theiterim report of the Reference Group on WelfareReform, of which they are both members.Michael Raper from ACOSS provided a stimulat-ing response to their review.

The second Business Economics Forum brief-ing for 2000, to be held on 15 June, will discussmacroeconomic policy in the transitional periodto the new tax system. The first update to

Moni-toring the GST

will be launched at this forumand will be incorporated into the briefing. Dis-cussion of the Melbourne Institute’s analysis willbe provided by Mr Bill Evans (General ManagerEconomics) of Westpac and Mr Paul Braddick(Senior Economist) of ANZ.

The third Business Economics Forum briefingfor 2000 will be held on 13 October. The specialtopic to be discussed will be industrial relationsreform. That forum will hear from Mr Peter Re-ith, the Federal Minister for Industrial Relations,and Mark Wooden of the Melbourne Institute.

Academic Papers, Conferences and the Seminar Program

In addition to our busy schedule of analysis andreports we continue to focus substantial effortson the business cycle research program.

Don Harding and Hyeon-seung Huh pre-sented papers, ‘Synchronisation of Business Cy-cles’ and ‘Estimating Asymmetric Output Cost ofLowering Inflation for Australia’ respectively, atthe Fourth Australian Conference of Macroecon-omists. Don Harding will present the paper(jointly with Adrian Pagan) on ‘Synchronizationof Business Cycles’ to the IFS conference in Lis-bon and to the Centre for International BusinessCycle and Growth Research, Manchester, on 6–8 July. He will also present a paper on ‘UsingComposite Indicators to Improve the Forecast-ing Performance of VARS’ at the IFS conference.Finally, Don will present a paper (jointly withAdrian Pagan) on ‘Dissecting the Cycle’ to theWorld Congress of the Econometric Society on11–16 August.

The Melbourne Institute continues its notedbusiness cycle seminar series, attracting emi-nent international speakers such as ProfessorRobert Gordon (Northwestern University) whowill speak on 6 July.

Business Cycles and Forecasting

Mr Don Harding addressing the Melbourne Institute Business Cycle Conference last year

6

ARC SPIRT Grant

The Melbourne Institute is in the third and finalyear of an Australian Research Council (ARC)SPIRT grant, which is examining the perform-ance of Australian enterprises. The broad aim ofthis very large project is to identify and quantifythe way in which different factors interact to in-fluence innovation, productivity and profitabilityof Australian enterprises.

A steady stream of research papers is nowemerging from this project and the flow of out-put is expected to accelerate during the remain-der of the year.

The Determinants of Profitability

In March this year a working paper entitled

De-terminants of Profitability: An Empirical In-vestigation Using Australian Tax Entities

(bySimon Feeny) was published. (See last page fordetails.)

This paper represents one of the first empiri-cal studies using firm-level data to investigate thedeterminants of profitability of Australian busi-nesses.

The results suggest that, in contrast to previ-ous research, profitability as represented by theprice-cost margin is strongly and positively influ-enced by entity size (even though market shareis controlled for separately). Capital intensity isalso found to have a strong positive relationshipwith profitability in most industries, possibly be-cause high capital requirements represent a bar-rier to entry.

This said, industry characteristics did not ex-hibit strong relationships with profitability inmost sectors. Industry concentration, for exam-ple, exhibited the expected significant positiverelationship with profits in only 27 per cent ofindustries. Similarly, various industry-basedmeasures of barriers to entry were only signifi-cant in a minority of cases.

Market share, on the other hand, was found tobe significantly related to profit in the majority ofindustries, though surprisingly the observed re-lationship was U-shaped—in other words, themost profitable businesses are those with eithera large market share or a very small marketshare. Such findings contrast markedly with pre-vious findings for the United States.

Innovative Firms

Another recently released working paper is enti-tled

Understanding Innovative Firms: An Em-

pirical Analysis of the GAPS

(by Mark Rogers).(See last page for details.)

This paper uses survey data of the AustralianBureau of Statistics to investigate the determi-nants of innovation.

The measure of innovation is based onwhether the firm introduced a new product orprocess in 1997. Various determinants are in-vestigated including market structure, exportstatus, the use of networks, and training. Theanalysis is conducted separately for manufactur-ing and non-manufacturing firms, and withineach sector, by firm size groups.

Overall, the results reveal that: there is per-sistence in innovative activities (that is, firms thatinnovated in 1995 are more likely to have inno-vated in 1997); small manufacturing firmswhich use networks tend to be more innovative;and medium sized firms that export are alsomore innovative. The main feature of the analy-sis, however, is not the number of variables thatare significant, but the number that are not.Moreover, the results vary dramatically acrossfirm size and sector, leading to the far from sur-prising conclusion that the process of innovationis complex.

The Significance of Import Competition

A working paper entitled

Import Competitionand Labour Productivity

was released in Maythis year. (See last page for details.)

This paper examines the impact of importcompetition on labour productivity using sampledata of Australian manufacturing firms over theperiod 1984 to 1993. Import competition isfound to interact with domestic competition insuch a way that the positive impact of importcompetition on the level and rate of growth of la-bour productivity rises with the degree of con-centration among domestic producers. Theresults suggest that the movement towards low-ering border protection on manufactured im-ports into Australia has led to enhancedproductivity by domestic producers, especiallythose in highly concentrated industries.

The Australian Tax Office Project

In 1999 the Melbourne Institute received fund-ing from the Australian Taxation Office (ATO)for a project examining the performance of Aus-tralian corporate entities.

The first part of the project, which is con-cerned with modelling and benchmarking prof-itability and involves the development of a series

of models to identify the main drivers of the prof-itability of Australian large business and interna-tional tax entities, has been completed. Thecurrent stage of the project focuses on model-ling effective tax rates and the deductions usedby Australian companies which lower their taxa-ble income. The final stage of the project will in-volve the development of training materials toequip members of the ATO with a greater under-standing of the derived models.

This research is expected to assist the ATO inunderstanding the factors that affect corporateprofitability and tax revenue, and will assist insuch areas as forecasting tax revenue.

The Innovation Scoreboard

This July is the ex-pected release datefor the

R&D andIntellectual Prop-erty Scoreboard2000

. The

Score-board

is producedby Simon Feeny andMark Rogers andjointly sponsoredby IBIS BusinessInformation andIP Australia. The

Scoreboard

is themost comprehensive assessment to date of theinnovative activities of large Australian enter-prises.

The innovative activities covered by the

Score-board

comprise the latest available informationon the level of R&D and applications for intellec-tual property (patents, trade marks and de-signs). These innovative activities are ranked byboth absolute amount and by intensity (as a pro-portion of enterprise revenue). Industry rank-ings are also provided enabling the

Scoreboard

to be an important information source forbenchmarking and competitor analysis. The

Scoreboard

will also include an InnovationIndex which incorporates a company’s R&D ac-tivity and patent, trademark and design applica-tions into a single figure and thereby identifiesAustralia’s most innovative firms.

Those wishing to place pre-release orders forthis publication can do so by contacting LaraHammond at the Melbourne Institute on (03)8344 5330.

Enterprise Performance

Mr Simon FeenyResearch Fellow

7

Mr Don Harding, Assistant Director,

Melbourne Institute

Associate Professor David Johnson, Deputy Director,

Melbourne Institute

Mr Ian Little, Secretary,

Department of Treasury and Finance

Professor Peter Lloyd, Ritchie Professor of Economics and Director,

Centre for Financial Studies, The University of Melbourne

Dr David Rosalky, Secretary, National

Administration,

Department of Family and Community Services

Mr Phil Ruthven, Executive Chairman,

IBISWorld

Professor Boris Schedvin, Deputy Vice-Chancellor (Academic Management),

The University of Melbourne

Mr Glenn Stevens, Assistant Governor (Economic),

Reserve Bank of Australia

Professor Ross Williams, Dean,

Faculty of

Economics and Commerce, The University of Melbourne

The Institute welcomes as new members:

Father Nic Frances, Executive Director,

Brotherhood of St Laurence

Associate Professor Alison McClelland,

Department of Social Work, La Trobe University

Professor Mark Wooden,

Melbourne

Institute

April Advisory Board meeting chaired by Dr Peter Jonson

Three of the Board members: Mr Phil Ruthven, Associate Professor Alison McClelland and Dr David Rosalky

News Items (continued from page 3)

•

Professor Ross Garnaut Seminars

Professor Garnaut will be presenting two seminars at the Melbourne Institute related to the subject of his current research (see page 3).

19 June Trade and Unemployment: Some Reflections on Stolper Samuelson in Australia18 July Free Trade, Wages, Social Security and Income Distribution: A New Look at an Old Australian Story

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Professor Mark Wooden’s Inaugural Lecture:

Industrial Relations Reform in Australia: Causes, Consequences and Prospects

6.30pm 14 August 2000, Trikojus Lecture Theatre, Biochemistry Building, University of Melbourne

As implied in its title, the lecture will focus on the recent Australian experience with industrial relations reform. It will cover the extent and significanceof change and the forces that have been driving change. The lecture will also examine a number of controversies surrounding the impact of that change.The final issue addressed concerns likely future directions.

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Melbourne Institute Conference:

Modelling the Incentive Effects of Reforms to Tax and Social Security

28 August 2000 (date to be confirmed), Canberra

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Melbourne Institute Public Economics Forum

12.00pm–1.45pm 6 October 2000, Canberra

The special topic to be addressed at this briefing will be industrial relations reform. The invited guest speaker is yet to be finalised. Respondents willinclude Mark Wooden of the Melbourne Institute.

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Melbourne Institute Business Economics Forum 7.30am–9.00am 13 October 2000, Melbourne The special topic to be addressed at this briefing will be industrial relations reform. The guest speaker will be Mr Peter Reith, the Federal Minister forIndustrial Relations. Respondents will include Mark Wooden of the Melbourne Institute.

• Melbourne Institute Conference: Welfare Reform: Where to from Here?8 November 2000 (date to be confirmed), University of MelbourneThis conference will focus on the findings and recommendations contained in the final report of the Commonwealth Government’s Reference Groupon Welfare Reform, of which Peter Dawkins is a member.

• Business Cycle Seminar Series and Labour Economics Seminar SeriesThe Melbourne Institute conducts these seminar series. For more information on the Business Cycle Seminar Series please contact Hyeon-seung Huhon (03) 8344 5744. For more information on the Labour Economics Seminar Series please contact Mark Harris on (03) 8344 5354.

For information on Melbourne Institute conferences or forums, please contact Karen Roe on (03) 8344 7885. For information about other events please contact Rachel Derham on (03) 8344 5325.

Forthcoming Events

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The Melbourne Institute operates two Eco-nomics Forums: the Business EconomicsForum (BEF) which is held quarterly in Mel-bourne and focuses on the economic outlookand a range of special economic topics, andthe Public Economics Forum (PEF) which isoriented towards public policy and held eachquarter in Canberra.

Different packages of benefits are availableto members of the BEF and the PEF, dependingon the level of membership. Three levels ofmembership are available to both BEF and PEF

members, Gold, Associate and Individual, eachcontaining a different package of benefits. Allmemberships include attendance at the quar-terly economic briefings and a copy of theMercer – Melbourne Institute Quarterly Bul-letin of Economic Trends. The total packageof potential benefits is summarised below.

• invitations to quarterly economic briefingsheld in Melbourne (BEF members) or thequarterly luncheon briefings held in Can-berra (PEF members)

• publications of the Melbourne Institute• discount registration at public conferences

(two per year are planned)• access to consulting by Melbourne Institute

researchers• other benefits negotiable

For further information on either theMelbourne Institute Business EconomicsForum or the Melbourne Institute PublicEconomics Forum, please contact KarenRoe on (03) 8344 7885.

Melbourne Institute Business and Public Economics Forums

Journals

The Australian Economic Review (Australia’s leading economic policy journal; quarterly)

Australian Social Monitor (6 issues per year)Mercer – Melbourne Institute Quarterly

Bulletin of Economic Trends

Macroeconomic and Social Indicators

Westpac – Melbourne Institute Indexes of Economic Activity (monthly)

Westpac – Melbourne Institute Survey of Consumer Sentiment (monthly)

Melbourne Institute Survey of Consumer Inflationary Expectations (Sponsored by the Reserve Bank; monthly)

Westpac – Melbourne Institute Survey of Consumer Sentiment: NSW, Vic., Qld, WA (quarterly)

Mercantile Mutual – Melbourne Institute Household Saving Report (quarterly)

Monitoring the GSTMelbourne Institute Wages Report

(quarterly)Poverty Lines: Australia (quarterly)

Recent Working Papers

Most of our working papers can be down-loaded from the Melbourne Institute website. Alist of the most recent working papers follows:

24/99 International Capital Flows, Exchange Rates and Macroeconomic Policy by Don Harding

25/99 Labour Supply Estimates for Married Women in Australia by Rosanna Scutella

26/99 Tax Models and Their Use by John Creedy

1/00 Determinants of Profitability: An Empirical Investigation Using Australian Tax Entities by Simon Feeny

2/00 A Model for Ordered Data with Clustering of Observations by Tim R. L. Fry and Mark N. Harris

3/00 A Comparison of Alternative Estimators for Binary Panel Probit Models by Mark N. Harris, Lachlan R. Macquarie and Anthony J. Siouclis

4/00 Outsourcing Public Employment Services: The Australian Experience by Elizabeth Webster and Glenys Harding

5/00 Modelling Export Activity of Eleven APEC Countries by László Mátyás, László Kónya and Mark N. Harris

6/00 Dynamic Relationships in the Australian Labour Market: Heterogeneity and State Dependence by Stephen Knights, Mark Harris and Joanne Loundes

7/00 Union Wage Effects in the Presence of Enterprise Bargaining by Mark Wooden

8/00 Understanding Innovative Firms: An

Empirical Analysis of the GAPS by Mark Rogers

9/00 Import Competition and Labour Productivity by Harry Bloch and James Ted McDonald

10/00 Analysing Firm-Level Labour Productivity Using Survey Data by Mark Rogers and Yi-Ping Tseng

Books, Monographs, Reports

Melbourne Institute Annual Report and Outlook

Evaluation of the Government’s Tax Package (Tax Reform: Equity and Efficiency Report 4)

How Big Business Performs: Private Performance and Public Policy (contact Allen & Unwin)

R&D and Intellectual Property Scoreboard 1999: Benchmarking Innovation in Australian Enterprises

The Contours of Restructuring and Downsizing in Australia

Policy Implications of the Ageing of Australia’s Population (contact the Productivity Commission)

For further information or a copy of thepublications brochure, please contactLara Hammond on (03) 8344 5330.

Melbourne Institute Publications

Enquiries relating to the Melbourne Institute may be directed toMelbourne Institute of Applied Economic and Social Research

The University of Melbourne, Victoria 3010 AustraliaPhone: +61 3 8344 5330 Fax: +61 3 8344 5630 Email: melb.inst@iaesr.unimelb.edu.au

For further information on the Melbourne Institute and its products and services, log on to http://www.ecom.unimelb.edu.au/iaesrwww/home.html