ISSN 1442-9500 (Print) ISSN 1442-9519 (Online) Print Post Approved PP381667/01204 Issue 6 December 2002

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@unimelb.edu.auWWW: http://www.melbourneinstitute.com

2002 The University of Melbourne, Melbourne Institute of Applied Economic and Social Research

December 15 wasthe 40th anniversaryof the foundation ofthe Melbourne In-stitute. In the early1960s economists atthe University of Mel-bourne were lookingat ways to increasethe profile of appliedeconomic researchat the University. A visiting academic from Cam-bridge, Ronald Henderson, proposed the estab-lishment of a group along the lines of theDepartment of Applied Economics at Cam-bridge. When the University subsequentlyadopted this proposal and asked Ronald Hend-erson to return to Australia to head up the newresearch institute, he readily accepted the chal-lenge. Ronald Henderson became the foundingDirector of Australia’s first independent institutefor applied economic research on 15 December1962.

In 1969 this new Institute of Applied Eco-nomic Research amalgamated with the Depart-ment of Research in Social Studies and becamethe Institute of Applied Economic and Social Re-search. In 1972 the Institute was formerly estab-lished as a research department within theUniversity with its own university statute.

Ronald Henderson was foundation Directorof the Institute for 17 years, until his retirementin 1979. Following his retirement, ProfessorHenderson’s successors were Dr Duncan Iron-monger, Acting Director from 1979 to 1984;Peter Dixon, Director from 1984 to 1991; andRichard Blandy, Director from 1992 to 1994. In1996 Peter Dawkins became Director and thename of the Institute was formally changed to theMelbourne Institute of Applied Economic andSocial Research. In the 1990s between appoint-

ments, Professor Ian Harper and Professor PeterLloyd served as Acting Directors.

To help celebrate this important milestoneevent, the 40th anniversary of the Melbourne In-stitute, current staff of the Melbourne Instituteinvited all previous employees to join them at acocktail function at University House on 12 De-cember. At this function, memories were shared,friends re-acquainted and the Melbourne Insti-tute’s successes over its 40-year history cele-brated. Speakers at this event were RichardScotton and Daina McDonald, both former staff,and the present Deputy Director, David Johnson.

In February 2002a further celebra-tion, in the form of aformal dinner at Or-mond College, willtake place. On thisoccasion, as well ascelebrating the past,the future researchagenda of the Mel-bourne Institute willbe a major focus. Guest speakers will include DrKen Henry, Secretary of the Treasury in Can-berra, and Mr Paul Kelly, Editor at Large,

TheAustralian

.As part of this

40th anniversarycelebration in Feb-ruary 2003, PaulKelly will be speak-ing about the bookhe has co-editedwith Melbourne In-stitute Director PeterDawkins, which is tobe launched in Feb-ruary and is based on the proceedings of the

To-wards Opportunity and Prosperity

Conference

which was held in April this year; this conferencewas jointly run by the Melbourne Institute and

The

Australian

. The title of this

book,

Hard Heads,Soft Hearts: A NewReform Agenda forAustralia

, is used asthe Melbourne Insti-tute’s motto: HardHeads, Soft Hearts.This phrase is drawnfrom a book byUS economist AlanBlinder. Before then the famous British econo-mist Alfred Marshall coined the phrase ‘CoolHeads, Warm Hearts’ representing much thesame idea. It also reflects the Melbourne Insti-tute’s fundamental belief in the need to be hard-headed in the analysis, but to have soft-heartedobjectives. At this important milestone in theMelbourne Institute’s history it is our plan thatthis idea will continue to shape the researchagenda at the Melbourne Institute in the years tocome.

Professor Henderson

Melbourne Institute Celebrates 40th Anniversary

Professor Dixon

Professor Blandy

Professor Dawkins

★★ Inside Stories ★★

• New Chairman of Melbourne Institute Advisory Board appointed. See page 3

• HILDA first wave results launched by Senator Vanstone. See page 4

• New ARC grant. See page 4

• Launch by Tony Abbott MP of report on unfair dismissals. See page 5

• Melbourne Institute forecasts of economic activity. See page 5

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In my seventh year as Director of the MelbourneInstitute, I was fortunate in obtaining fourmonths away from administrative duties underthe University’s special studies program. I havejust returned from this leave which was spentmainly at the University of Nottingham, withshorter visits to the Brookings Institution and theAustrian Institute of Economic Research. Mymain activity was to edit a book jointly with PaulKelly, Editor-at-Large,

The Australian

, basedupon the April 2002

Towards Opportunity andProsperity Conference

. This will be publishedin February 2003 by Allen & Unwin. I alsoworked on papers on topics such as welfare re-

form, jobless households and higher educationpolicy. I return renewed and refreshed andlooking forward to the 40th anniversary celebra-tions, and a number of other major projects in-cluding the second joint Economic and SocialOutlook Conference with

The Australian

to beheld on 6–7 November 2003.

Meanwhile, many thanks are due to DavidJohnson for acting as Director in my absence.

13 December 2002

Hard Heads, Soft Hearts: Director’s Letter

Professor Peter DawkinsRonald Henderson Professor and Director

The Debate on Poverty Measurement

Early this year there was vigorous debate aboutthe extent of poverty and trends in poverty inAustralia. The welfare group The Smith Familypublished a report prepared by NATSEM (seeHarding, Lloyd and Greenwell 2001) claimingthat the poverty rate had risen from 11 per centto 13 per cent of the population over the 1990s.These estimates were strongly attacked, particu-larly by staff from the Centre for IndependentStudies (CIS), who criticised many aspects of thereport, including the selection of benchmarks,the reliability of data and the interpretation ofthe results (Tsumori, Saunders and Hughes2002; Saunders 2002). Following the debate,and extensive media exposure to the issue ofpoverty measurement, the Senate announced theterms of reference for an inquiry into measure-ment of poverty and inequality.

A key aspect of the debate concerned the se-lection of a poverty line from which rates of pov-erty are calculated. The poverty line is thethreshold income level below which a family isbelieved to be poor. The protagonists debatedwhether the most appropriate poverty line wasone that was a proportion of mean or median in-come, though as I will argue, these are neitherthe only nor necessarily the best selections. TheSmith Family chose a reference poverty line at 50per cent of mean income, while the CIS claimedthat 50 per cent of median income was a moregenerally accepted international standard.

Professor Ronald Henderson, the first Direc-tor of the Melbourne Institute, recommendedthe regular publication of poverty lines in hisFirst Main Report to the Commonwealth Inquiryinto Poverty (see Commission of Inquiry into

Poverty 1975). Since then the Melbourne Insti-tute has published updates of the poverty linesevery quarter. The Henderson poverty lines arenot a constant proportion of either mean or me-dian income, though they are updated by move-ments in a measure of average income (percapita household disposable income). Almostfrom their inception the Henderson poverty lineshave come in for criticism, much of it related totheir use in the calculation of poverty. While ac-cepting that many of the criticisms are valid, theHenderson poverty lines still have a role settinga benchmark with which individual circum-stances may be compared.

1

Key Issues

The contentious nature of poverty measurementis not new but it is important. There are severalkey issues: the role of individual value judge-ments; the reliability and representativeness ofdata; and the interpretation of levels and trendsin poverty. Foremost is the role of value judge-ments. All measures reflect the value judgementsand choices of the researchers. Particularchoices may reflect societal attitudes better thanothers, but there is no objective measure of pov-erty.

The reliability of data is the second matter ofimportance. There are valid concerns about thereliability of existing income and expendituredata that mean that researchers have to be verycareful about the inferences they draw from cal-culations based on these data. It is certainly truethat the apparent difference between reported

income and expenditure for very low incomeearners seems implausible and data for veryhigh income earners are also suspect. Under-reporting of income is likely to be one of anumber of reasons for these problems. How-ever, in measuring trends in poverty, the under-reporting of income levels may not be so bad—so long as they are consistently under-reported.

The third important matter is the interpreta-tion of both the level of and trends in poverty. Akey issue is whether poverty is treated as a rela-tive concept, an absolute concept, or reflectsboth notions. Absolute poverty refers to the ideathat poverty can be measured in relation to somefixed standard of need, for instance the numberof calories required to maintain health. By con-trast, relative poverty refers to standards set incomparison to prevailing societal standards (sothat if general standards of living rise, then sodoes the standard of living afforded by the pov-erty line). Modern societies are concernedabout both absolute and relative poverty, or toput it another way, about both material stand-ards of living and the relativity between people.If this is true then poverty research should re-port both, clearly distinguishing between them.

Interpretation of Poverty Results

Poverty rates at a point in time are often pub-lished and discussed in the media. They are ofgreat public interest. Unfortunately, debate aboutthem is often fairly meaningless. Since there areno generally accepted reference poverty line orequivalence scales, the choices are entirely at thediscretion of the researcher. Effectively the

Some Reflections on Calculating Poverty by David Johnson, Deputy Director

1. Johnson (1996) provides a full discussion of therole, use and limitations of poverty lines. (continued on page 7)

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Peter Jonson to Hand Over to Tony Cole as Chair of Advisory Board

After 10 years service as Chair of the AdvisoryBoard, Dr Peter Jonson will be handing over toMr Tony Cole in 2002. The Director and staff ofthe Melbourne Institute wish to express theirthanks for the commitment that Peter gave to theInstitute over that period. The Advisory Boardhas played a very important role in the life of theInstitute. Peter’s service to the Institute has beenrecognised with his appointment as EmeritusChairman. Mr Tony Cole who will be taking overthe Chair of the Advisory Board has been a mem-ber of the Board for seven years and has beenChair of the Melbourne Institute Business Eco-nomics Forum and Co-Chair of the MelbourneInstitute Public Economics Forum. He is Princi-pal – National Practice Leader of William M.Mercer Investment Consulting and is a formersenior public servant, including for exampleSecretary of the Commonwealth Treasury.

Melbourne Institute Advisory Board Sub-Committees Established

The Melbourne Institute has grown substantiallyin size over the last three years in terms of its re-search agenda, staffing and budget. Delegationof responsibility to a second level of manage-ment commenced with the definition of three re-search programs, each with its own budget andprogram manager, and this year has continuedwith the establishment of three sub-committeesof the Advisory Board.

The role of these sub-committees is to pro-vide advice to each research area. Mr Phil Ruth-ven, Executive Chairman IBISWorld, is thechairman for the Enterprise Performance pro-gram Advisory Board sub-committee. Mr Ian Lit-tle, Secretary of the Department of Treasury andFinance in the Victorian Government, heads-upthe sub-committee advising the Labour, Socialand Fiscal Studies area. Mr Glenn Stevens, Dep-uty Governor of the Reserve Bank of Australia,chairs the sub-committee advising the Centre forBusiness Cycle Analysis. Each of the sub-committees will meet annually to review their re-spective program area’s research agenda, adviseon strategic objectives and performance, andoffer comments on specific proposals.

Two New Research Fellows

Dr Jongsay Yong joined the Institute as a Re-search Fellow in May 2002. Prior to this he was

a Senior Lecturer in the Department of Econom-ics at the National University of Singapore, wherehe started his academic career after obtaininghis PhD from the University of British Columbiain Canada in 1993. Jongsay’s research has pri-marily been in applied microeconomics, includ-ing areas such as industrial organisation,regulation, transport, environment and healtheconomics. His work at the Melbourne Institutewill focus on two principal areas: health eco-nomics and regulatory and competition issues.

In June Ben Jensen returned to the Mel-bourne Institute as a Research Fellow after sometime as Assistant Professor of Economics at Hart-wick College in New York. Ben has an honoursdegree in commerce and was a Ronald Hender-son Scholar of the University of Melbourne from1999 to 2001. He has recently submitted hisPhD. Ben is working in the Labour, Social andFiscal Studies area of the Melbourne Institute.

Dr John Nieuwenhuysen Joins Melbourne Institute

In August the Mel-bourne Institutewas delighted towelcome Dr JohnNieuwenhuysen asa Principal Fellow.John holds a Mas-ter of Arts fromNatal University, aPhD from LondonUniversity and is a

Fellow of the Australian Academy of the SocialSciences. From 1996 to 2002 John was Chief Ex-ecutive of CEDA (Committee for Economic De-velopment of Australia), and from 1989 to 1996he was Foundation Director of the Common-wealth Government’s Bureau of Immigration,Multicultural and Population Research. John is

most widely known for his 1986 report on liquorreform to the Victorian Government. The re-port’s acceptance and enactment by the CainGovernment in 1988 transformed and liberal-ised the industry, enabling the growth ofEuropean-style premises. In 2000 John wasmade a ‘Special Legend’ of the Victorian Foodand Wine Industry in recognition of his work. In1983 John also chaired a State Government Re-view of Revenue Raising in Victoria. John’s con-tribution to the Melbourne Institute will includeassisting with research grants and the WorkingPaper series, as well as with development andmarketing issues, especially in regard to specialevents, conferences and seminars.

Prestigious Downing Fellowship

Alan Duncan, a Professorial Fellow of the Insti-tute, was invited by the Faculty of Economics andCommerce to deliver the 16th Annual DowningLecture in September 2002. The Downing Fel-lowship was established in 1978 in memory ofRichard Ivan Downing, who was Ritchie Profes-sor of Research in Economics at the Universityfrom 1952 until his death in 1975. This Fellow-ship provides the opportunity for distinguishedvisiting economists to present their views ‘for thepurpose of promoting analysis and discussion ofeconomic and social research policy’. The topicof Alan’s lecture was

Promoting Employmentthrough Welfare Reform: Lessons from thePast, Prospects for the Future

.

Staff Promotions

Two research staff members have recentlybeen awarded academic promotions. RosannaScutella is now a Research Fellow of the Mel-bourne Institute and Dr Guyonne Kalb has beenpromoted to Senior Research Fellow. Congratu-lations are extended to both of them.

News on Staff and Other Developments

Ben Jensen and Jongsay Yong

John Nieuwenhuysen

Rosanna Scutella and Guyonne Kalb

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The HILDA Survey

Data from wave 1 of the Household, Income andLabour Dynamics in Australia (HILDA) Survey,Australia’s first large-scale, nationally represent-ative household panel survey, were released bythe Hon Amanda Vanstone MP, Minister for Fam-ily and Community Services, at a launch held inconjunction with the Melbourne Institute’s Pub-lic Economics Forum in Canberra on 15 Octo-ber. The first wave of HILDA has generally beenacclaimed as a great success, with 7682 house-holds participating. This has generated a data setcomprising almost 14,000 individuals. With over3000 variables about these individuals, theHILDA Survey provides what is arguably the rich-est single source of data about income, workand families in this country.

Accompanying the launch was an Annual Re-port summarising progress and outcomes todate. In addition, the report provides a shortsummary about some of the more interestingfindings that emerge from an initial inspection ofthese data.

A confidential version of the unit-record dataset has been prepared by the HILDA project teamand is now available to academics, governmentagencies and other approved persons for re-search purposes.

Wave 2 is currently in the field, and the HILDAProject Team is working closely with ACNielsento minimise attrition.

While researchers have not had the data forlong, the Melbourne Institute, in conjunctionwith FaCS, is organising a conference on theHILDA Survey data for 13 March 2003. Anumber of visiting academics from overseas willbe speaking, including Professor DanHamermesh from the University of Texas andProfessor Stephen Jenkins from the University ofEssex.

For more information about the HILDA Sur-vey, see the comprehensive and up-to-date pagesmaintained on the Melbourne Institute website.

New ARC Grant: The Dynamics of Economic and Social Change

The results of Australian Research Council(ARC) Discovery Grants for 2003 were an-nounced in October, and a project headed byMark Wooden was among those awarded fund-ing. Titled ‘The Dynamics of Economic and So-cial Change’, the project will use the HILDASurvey data to address a large number of re-search questions of fundamental importance to

Australians and the way they live. These ques-tions cover three main areas: (i) income, pov-erty and well-being; (ii) labour supply and workincentives; and (iii) the changing nature ofwork. The project is to extend over three yearsand a total of $360,000 was provided. Co-chiefinvestigators are Professor Jeff Borland, fromthe Economics Department, and Professor AlanDuncan, who, while based at the University ofNottingham, is a very active Professorial Fellowof the Melbourne Institute.

FaCS Social Policy Research Contract

One of the Melbourne Institute’s larger ongoingresearch contracts is its Social Policy Researchcontract with the Federal Department of Familyand Community Services. Now nearing the end ofits second year (the initial contract is for fouryears), 31 projects have been started and sevenof these are now complete. Projects fall intothree main streams: (i) empirical studies of theinteraction between the labour market and thesocial security system; (ii) economic and socialanalysis of families and communities; and (iii)the supply of and demand for income security.Examples of projects recently completed withineach of these streams now follow.

Reliance on Income Support in Australia

This project examined the issue of welfare de-pendence, and in particular how pervasive andpersistent it is. It was found that, over the courseof a year, one-third of the Australian populationaged 15–64 years is at some stage reliant on wel-fare, with one-sixth reliant for an entire year.This represents a significant increase in welfaredependence since the early 1980s, when lessthan one-quarter of the workforce-age popula-tion was reliant at some stage of the year. Thestudy also found that once a person becomesheavily reliant, exit from that state becomes verydifficult. For example, over 80 per cent of per-sons reliant on welfare for over half of one yearare also reliant for over half the following year.(See Working Paper 6/02,

Reliance on IncomeSupport in Australia: Prevalence and Persist-ence

by Yi-Ping Tseng and Roger Wilkins.)

Understanding and Improving Data Quality Relating to Low Income Households

The recent announcement of a Senate inquiryinto poverty is likely to lead to a focus on its

measurement. In the past, estimates of povertyhave generated a great deal of controversy, withthe quality of data, particularly that reported forthe poor, argued to be unreliable and thus notjustifying many of the inferences about povertymade by researchers. This issue was at the cen-tre of the Senate inquiry. Clear evidence ofunder-reporting of income was found, but thiswas just one of a number of reasons for apparentinconsistencies in data. It was concluded thatgreat care needs to be taken when using the dataand that a process of triangulation be used in re-lation to making inferences from results. (Thechief investigators are David Johnson and Ro-sanna Scutella.)

Incidence and Trends in Jobless Families

This study examined the distribution of employ-ment across households over time. It found thatemployment is becoming increasingly polarisedacross households, with growth in both no-earner and two-earner households. Moreover,the shift to smaller households only explainspart of this trend. The trend is of particular con-cern in households with children, where thisdramatic polarisation of work and incomes islikely to have consequences for welfare costsand children’s opportunities in the next genera-tion. (See Working Paper 9/02,

EmploymentPolarisation in Australia

by Peter Dawkins,Paul Gregg and Rosanna Scutella.)

Health Research

Health research at the Melbourne Institute hashad a long and illustrious history. Much of Medi-bank, the predecessor of the present Medicaresystem, was conceived and developed at the Mel-bourne Institute in the early 1970s. Followingthis tradition, the Melbourne Institute launcheda number of new research initiatives in healtheconomics in 2002. These include projectscommissioned by the Victorian Department ofTreasury and Finance to provide an overall as-sessment of the Australian health care system,and development work for the preparation of anapplication under a new NHMRC funding initia-tive on

Interfacing Health Research withHealth Policy and Practice

, of which the firstround is a five-year $10-million program on theEconomics and Financing of Health.

Labour, Social and Fiscal Studies

(continued on page 7)

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Business Cycle Centre Continues to Achieve International Recognition

Work being undertaken in the Business CyclesCentre is continuing to be noticed internation-ally, as is evidenced by invitations to speak at in-ternational conferences. Don Harding wasinvited to speak at a two-day colloquium in Lux-embourg in November. The

Colloquium onModern Tools for Business Cycle

Analysis

wasorganised by Eurostat, the statistical agency ofthe European Union, and took place on 28–29November. Don’s paper, which is available onour website, is

Non-Parametric Measures ofthe European Business Cycle

.On 20–21 June Pete Summers attended a

conference in Manchester on

Growth and Busi-ness Cycles in Theory and Practise

. This con-ference was organised by the Centre for Growthand Business Cycle Research at the University ofManchester. Pete then attended the 22nd Inter-national Symposium on Forecasting, held atTrinity College in Dublin, on 23–26 June. Hepresented a paper entitled

On the InteractionsBetween Growth and Volatility in a MarkovSwitching Model of GDP

at this meeting.Don Harding presented findings from his re-

search at a number of important internationalconferences during 2002. In late July he at-tended the Latin American meetings of theEconometric Society in Sao Paulo, Brazil, wherehe presented a paper entitled

The Comparisonof Two Dating Methods

. Immediately followingthis meeting he attended the

Conference onCommon Features

in Rio de Janeiro, where hepresented a paper called

Synchronisation ofCycles

. From 24–28 August Don attended theEuropean meetings of the Econometric Society,which were held in Venice. At this meeting Donpresented a paper entitled

Extracting, Usingand Analysing Cyclical Information

. (All of thepapers mentioned here are jointly authored withProfessor Adrian Pagan of the ANU and UNSW.)

Economic Forecasts and Report on Unfair Dismissals

The Business Cycle Centre’s latest economicforecasts presented at the December BusinessEconomics Forum and published in the

Mercer– Melbourne Institute Quarterly Bulletin ofEconomic Trends

4.02 are shown in Table 1.The highlight of the Business Economics Forumin Melbourne on 29 October was the launch, bythe Hon Tony Abbott MP, Minister for Employ-ment and Workplace Relations, of an importantreport by Don Harding on unfair dismissal laws.This report, entitled

The Effects of Unfair Dis-missal Laws on Small and Medium Sized Busi-nesses

, was commissioned by the FederalDepartment of Employment and Workplace Re-lations.

Don presented an overview of the report atthe Forum. The findings are based on statisticalanalysis of a carefully designed survey of 1800small and medium sized businesses (less than200 permanent employees) throughout Aus-tralia. The report suggests that the unfair dis-missal (UFD) laws cause both adverse equityand efficiency effects. The adverse effects arisebecause the UFD laws discourage businessesfrom hiring certain types of job applicants—those that change jobs frequently for no appar-ent reason and the long-term unemployed. Theadverse efficiency effects arise because the UFDlaws impose costs on firms. The lower bound onthe estimate of these costs for the economy as awhole is $1.3 billion, which is about 0.2 per centof GDP. According to Don, the best estimate ofthe costs is likely to be substantially above thislower bound. The average cost impost was $296per full-time employee. As can be seen in Figure1, the cost impost varies consider-ably by industry, being highest inaccommodation and lowest in re-tail trade.

The ACTU’s Linda Rubensteinresponded to Don’sreport findings at theForum. She statedthat the ACTU doesnot believe that thesurvey strengthensthe case for exempt-ing small businessfrom UFD laws, orfor making any otherchanges restrictingworkers’ rightsunder the law.

The key reasons she gives for this are:

• fair treatment at work is a reasonable expec-tation for all workers;

• the survey does not prove that UFD is amajor concern of small business, although itdoes indicate that employers would preferto have fewer obligations towards employ-ees, as might be expected;

• there is no objective evidence of the effect ofUFD on employment, particularly in light ofthe existence of state jurisdictions long be-fore the introduction of federal laws and theassociated political campaign; and

• while there may be a cost associated withproviding fair treatment of employees, thesurvey does not ask whether this providesbenefits to the business, including retentionand better workplace relations.

The report on unfair dismissals is available infull on the Melbourne Institute website.

Business Cycles and Forecasting

Pete Summers at the Melbourne Institute Business Economics Forum

$ per year

Figure 1: Average Cost Per Full-Time Employee

Accommodatio

n

Manufacturin

g

Communicatio

ns

Recreat

ion

Transport

Wholesale

trade

Health

Constructio

n

Finance

Retail t

rade

0

50

100

150

200

250

300

350

400

450

500

Table 1: Melbourne Institute Forecasts of Economic Activity, September Quarter 2002 to June Quarter 2004 (per cent)

2002 2003 2004

Sept. Dec. Mar. June Sept. Dec. Mar. June

GDP

a

3.1 2.7 2.6 2.6 2.7 2.5 2.5 2.5

Inflation

a

2.7 2.6 2.6 2.5 2.2 2.2 2.2 2.3

Consumption

a

5 4.9 4.7 4.2 4.2 4.2 4.2 4.2

Unemployment

b

6.2 6 6 6 6 6 6.1 6.1

Employment

a

1.9 1.9 1.3 1.5 1.4 1.6 1.6 1.6

90-day bill rate 5 4.7 4.7 4.7 4.7 4.7 4.7 4.8

Notes

: (a) Per cent change from same quarter in previous year.(b) Unemployment rate, per cent of labour force, average for quarter.

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Management and Industrial Relations in the 21st Century

Four papers (which are summarised below)from a research program series entitled

Management and Industrial Relations inthe 21st Century

have been released asworking papers by the Enterprise Perform-ance area during 2002. This project is sup-ported by the Australian Research Council,the Business Council of Australia and theCommittee for Economic Development ofAustralia. These working papers are dis-cussed below. (The views expressed in thesepapers represent those of the authors andnot necessarily the views of the collaborativepartners.)

Industrial Relations Reform and Business Performance

The first of these papers, Working Paper 2/02(see page 8), looks at industrial relations re-form and business performance. While there ap-pears to be widespread consensus, at leastamong industry and government, that enterprisebargaining has been beneficial for productivity,many academics have argued that the link be-tween the type of bargaining structure and work-place productivity is a contentious one. In thisworking paper Mark Wooden, Joanne Loundesand Yi-Ping Tseng present their findings from areview of the literature in this area. They con-clude that there are no clear-cut findings andthat much of relevant research literature ispoorly developed.

Industrial Relations Climate in Australian Enterprises

A second working paper (Working Paper 7/02)looks at factors affecting the industrial relationsclimate in Australian enterprises. Joanne Loun-des and Beth Webster have used enterprise leveldata to investigate the factors that are associatedwith cooperative industrial relations climateswithin major Australian enterprises. Climate iscommonly measured along a uni-dimensionalscale ranging from adversarial to cooperative,and there is a view in the literature—albeit nota consensus—that more cooperative climatesare more productive.

The authors show that organisations whichhave well-developed and bilateral channels ofcommunication between managers and employ-ees, and those companies that use systematic

and analytical methods for making major de-cisions, tend to have the most cooperativerelationship climate between management, em-ployees and unions. The degree to which a com-pany has embraced industrial relations reformwas not found to be associated with industrialclimate.

Are Pro-Reformers Better Performers?

There appears to be widespread consensus inindustry and government that a switch from cen-tralised bargaining to an enterprise-based sys-tem benefits productivity. However, researchsuggests that the link between bargaining struc-tures and worker productivity is dubious andthat empirical research has been unable to dis-cover a relationship between them. In this work-ing paper (Working Paper 18/02) Tim Fry, KellyJarvis and Joanne Loundes have used enterprisedata to examine the links between performanceand a range of human resources, industrial rela-tions and management variables to determinewhether bargaining structures do impact on per-formance. In particular, they looked at whetherorganisations that have incorporated aspects ofthe industrial relations reform agenda have out-performed organisations that have not.

The results from the application of atreatment-effects regression model indicate thatorganisations adopting the industrial relationsreform agenda report significantly higher levelsof self-assessed labour productivity relative totheir competitors, even after controlling for anumber of different factors.

Business Use of the Internet in Australia

Combining aggregate data from the ABS withmicro data from the

Melbourne InstituteBusiness Survey

, Joanne Loundes has com-menced a series of studies on Internet use bythe business sector (see Working Paper 20/02). The existing literature suggests that In-ternet use is only beneficial to an organisa-tion when it is incorporated into an overallstrategy. However, Joanne’s research showsthat organisations that are competitivelystrong in at least one area (e.g. operationalexcellence, customer intimacy or productleadership) are more likely to use particularfeatures of the Internet than the rest of thesample. Previous research also indicatesthat there are significant differences in Inter-net adoption by company according to typeof industry. Joanne’s evidence suggests that

Internet usage does indeed vary across indus-tries, with manufacturers more likely to use theInternet for the coordination of delivery ar-rangements than service industries, which aremore likely to use the Internet for customer self-service and personnel benefits.

Intangible and Intellectual Capital

As part of her combined role with the Intellec-tual Property Research Institute of Australia(IPRIA, see http://www.ipria.org/), Beth Web-ster has undertaken a review of theoretical andempirical academic economic studies on themeaning and importance of intangible and intel-lectual capital (Working Paper 10/02). Her re-view appraises measures of the importance ofintangible and intellectual capital; whether opti-mal levels of investment in intangible and intel-lectual capital can be said to exist; and,accordingly, whether governments should inter-vene in the market. On balance, theory favoursthe view that, for reasons associated with uncer-tainty, non-mortgageability and economies ofscale, there is an under-investment in these typesof investment. However, the extent to which thisis true will differ according to the prevalence ofuncertainty, non-mortgageability and scaleeconomies for each type of capital item. Themost common policies to stimulate the produc-tion of intangible capital, especially intellectualcapital, are government grants, subsidies and re-search consortia. Optimal policies adjust the in-centive to produce so that the marginal costs tosociety are equal to the marginal benefits.

Industrial Economics

From left: Joanne Loundes, Tim Fry and Kelly Jarvis

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researcher picks the poverty rate. In this contextdiscussion of what is the ‘correct’ current pov-erty rate is simply a matter of opinion. To justifya particular level the researcher has to justify thelevel of the poverty line. It is probably better toreport the rates of poverty that arise from a rangeof poverty lines, and leave it to the reader tochoose which level they think appropriate.

Trends are also of great interest and are notquite so subject to the discretion of the re-searcher. While it remains true that the re-searcher chooses the poverty line andequivalence scales, it is likely that a range ofchoices will produce consistent trends.

References

Commission of Inquiry into Poverty 1975,

Pov-erty in Australia

, First Main Report (Chair,R.F. Henderson), AGPS, Canberra.

Harding, A., Lloyd, R. and Greenwell, H. 2001,‘Financial disadvantage in Australia 1990 to2000’, NATSEM and The Smith Family, down-loaded from www.smithfamily.org.au

Johnson, D.T. 1996, ‘The application of povertylines to the measurement of poverty’,

Austral-ian Economic Review

, no. 113, pp. 110–26. Saunders, P. 2002, ‘Poor statistics’, Issues Paper

no. 23, Centre for Independent Studies, April,downloaded from www.cis.org.au

Tsumori, K., Saunders, P. and Hughes, H. 2002,‘Poor arguments’, Issues Paper no. 21, Centrefor Independent Studies, January, down-loaded from www.cis.org.au

Appendix: A Strategy for Measuring Poverty

A strategy for measuring trends in poverty is asfollows. First, pick a level of a poverty line at apoint in time—it doesn’t much matter which,since the choice is always subjective. Overseas(European) researchers often use somewherebetween 50 and 60 per cent of mean or medianincome. The Henderson poverty line for a stand-ard family (two adults and two dependent chil-dren) is about 60 per cent of average earningsand will do for most purposes.

Next, use equivalence scales to calculate pov-erty lines for different household types. Equiva-lence scales show the level of income needed fora household type other than the standard, rela-tive to the standard. There are many choiceshere. Probably the best source of new informa-tion reflecting current Australian conditions forupdating equivalence scales is the work by PeterSaunders and others from the Social Policy Re-search Centre on budget standards. Derive rela-tivities from that work or choose some verysimple system (e.g. 1 point for the head, 0.6 for

the second and subsequent adults, and 0.3 forall dependents).

Choose an index to update the poverty lineover the period of interest. For the relative line,movements in average household incomes perhead are a good choice, and for an absolute line,choose movements in consumer prices.

Finally, choose an index for measuring pov-erty. The simplest is to count the number of peo-ple below the poverty line—known as the headcount. The head count suffers from a number ofproblems and is particularly sensitive to con-cerns about quality of income data. An incomegap measure that adds up the total amount of in-come shortfall is probably best for most pur-poses. More sophisticated measures that givegreater weight to the poorest people may also bechosen, but most trends will be revealed by anincome gap measure.

The above procedure may be used with datafrom both income and expenditure surveys. Ex-penditure data have been less criticised than in-come data, but nevertheless have problems oftheir own—there are all sorts of difficult issuesin relation to assets, interest, depreciation, andthere are also known problems with reporting ofparticular items (gambling, alcohol and to-bacco).

David Johnson, Deputy Director

Some Reflections on Calculating Poverty (continued from page 2)

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Education Research

The Melbourne Institute has recently expandedits research related to the education sector. Withfunding from the Victorian Department of Treas-ury and Finance, research has been conductedinto various elements of the Victorian primary

and secondary education sectors. This work willcontinue in the new year, with a focus on thedrivers of student and school performance, thelabour market for educators, and the funding ofprimary and secondary education.

Under the leadership of Emeritus ProfessorBoris Schedvin, an Associate of the Melbourne

Institute, we are also bringing together manyleading thinkers in the area of education with aview to organising a major conference in 2003and publishing a book, provisionally entitled

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Labour, Social and Fiscal Studies (continued from page 4)

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Working Papers, 2002

Most of our working papers can be down-loaded from the Melbourne Institute website.

1/02

How Unreasonable Are Long Working Hours?

by

Mark Wooden and Joanne Loundes

2/02

Industrial Relations Reform and Business Performance: An Introduction

by

Mark Wooden, Joanne Loundes and Yi-Ping Tseng

3/02

The Dynamic Performance of Australian Enterprises

by Derek Bosworth and Joanne Loundes

4/02

The Relationship between Juvenile and Adult Crime

by Guyonne Kalb andJenny Williams

5/02

The Net Benefit to Government of Higher Education: A ‘Balance Sheet’ Approach

by David Johnson and Roger Wilkins

6/02

Reliance on Income Support in Australia: Prevalence and Persistence

by Yi-Ping Tseng and Roger Wilkins

7/02

Factors Affecting the Industrial Relations Climate in Australian Enterprises

by Elizabeth Webster and Joanne Loundes

8/02

Estimation of Wage Equations in Australia: Allowing for Censored Observations of Labour Supply

by Guyonne Kalb and Rosanna Scutella

9/02

Employment Polarisation in Australiaby Peter Dawkins, Paul Gregg and Rosanna Scutella

10/02 Intangible and Intellectual Capital: A Review of the Literature by Elizabeth Webster

11/02 A Cost Function for Higher Education in Australia by John Creedy, David Johnson and Ma. Rebecca Valenzuela

12/02 Work and Family Directions in the US and Australia: A Policy Research Agendaby Robert Drago, Rosanna Scutella and Amy Varner

13/02 Measuring the Local Impact of Electronic Gaming Machines by David Johnson

14/02 New Estimates of the Private Rate of Return to University Education in Australia by Jeff Borland

15/02 Firm Performance and Investment in R&D and Intellectual Propertyby Mark Rogers

16/02 Perceptions of Job Security in Australiaby Jeff Borland

17/02 Intransigencies in the Labour Supply Choice by Mark N. Harris and Alan Duncan

18/02 Are Pro-Reformers Better Performers? by Tim R.L. Fry, Kelly Jarvis andJoanne Loundes

19/02 Optimal Employee Turnover Rate: Theory and Evidence by Mark Harris,Kam-Ki Tang and Yi-Ping Tseng

20/02 Business Use of the Internet in Australiaby Joanne Loundes

21/02 Regime Switches in GDP Growth and Volatility: Some International Evidence and Implications for Modelling Business Cycles by Penelope A. Smith and Peter M. Summers

22/02 Intellectual Capital: Accumulation and Appropriation by Laurie Hunter

23/02 Public Capital, Congestion and Private Production in Australia by Lei Lei Song

24/02 Estimation of Labour Supply Models for Four Separate Groups in the Australian Population by Guyonne Kalb

25/02 The Effect of a Reduced Allowance and Pension Taper Rate: Policy Simulations Using the Melbourne Institute Tax and Transfer Simulator by Guyonne Kalb and Hsein Kew

26/02 The Effect of a Reduced Family Payment Taper Rate: Policy Simulations Using the Melbourne Institute Tax and Transfer Simulator by Guyonne Kalb, Hsein Kew and Rosanna Scutella

27/02 Economic Analyses of Families: Existing Research Findings by David Johnson and Guyonne Kalb

28/02 Factors Affecting Return to Work after Injury: A Study for the Victorian WorkCover Authority by David Johnson and Tim Fry

29/02 Cost Focussed Firms and Internet Usage by Joanne Loundes

Other PublicationsMelbourne Institute Annual Report and

OutlookHousehold, Income and Labour Dynamics

in Australia (HILDA) Survey Annual ReportHow Big Business Performs: Private

Performance and Public Policy (contact Allen & Unwin)

R&D and Intellectual Property Scoreboard 2002: Benchmarking Innovation in Australian Enterprises (contact IPRIA, University of Melbourne)

Downsizing: Is it Working for Australia?The Contours of Restructuring and

Downsizing in Australia Policy Implications of the Ageing of

Australia’s Population (contact the Productivity Commission)

The Economics of Intangible Investment (contact Edward Elgar)

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