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Do Underlying Measures of Inflation Outperform Headline Rates? Evidence from Australian Data
by
Lei Lei Song
December 2003
Many central banks often focus on underlying measures of inflation when assessing inflation trends. This paper compares the accuracy of underlying measures of inflation relative to the headline rates by using Australian data. It is found that the underlying measures did have smaller errors in predicting the long-term trend in inflation than the quarterly headline rate in the sample period 1977—2001 and the inflation targeting subperiod starting from 1993, due to the large volatility of the headline rate. As compared to the year-ended headline rate, the statistical test results , however, support only the measure of market prices excluding volatile items, not the others. There is some weak evidence of the weighted median measure outperforming the headline rate in the subperiod after 1993. With respect to directional accuracy, the test statistics cannot reject the null hypothesis of an equal probability correctly predicting the moving direction of the inflation trend, though the headline rates have a higher probability.
This paper examines the implications, for overall social welfare and inequality comparisons, of using different definitions of the unit of analysis - the income recipient - in computing summary measures. Comparisons are made using the Melbourne Institute Tax and Transfer Simulator (MITTS), a simulation model of the Australian direct tax and benefit system, of the effects of flattening the marginal tax rate structure. The reform was found to reduce inequality in all cases. However, it was not always judged to improve social welfare, depending on the degree of inequality aversion and the type of income unit chosen.
This study examines the impact of the Jobseeker Diary program (JSD), a large-scale intervention designed to increase job search effort of unemployed persons in Australia. Its scale, and focus on work-search verification, make the JSD program relatively unique in the international context. Participation in the JSD is found to significantly increase the likelihood of an unemployment payment recipient exiting payments, and to reduce total time spent on payments. At least one-half of JSD participants are estimated to have reduced time on payments. Largest effects of the JSD occur for payment recipients for whom labour demand conditions are the most 'favourable'. The findings on the impact of the JSD are robust to a wide range of sensitivity checks.
In this paper we explore the meaning and relevance of community and social capital, working mainly in economics though drawing on other disciplines. Economic studies of community have focussed in one of two main areas, neighbourhood studies and regional economics. We discuss the contributions of both to understanding about communities. In public discourse the concept of social capital has emerged as a resonant measure of community strength. Our review suggests that is a slippery concept with ambivalent and sometimes ambiguous interpretation. Nevertheless it has been useful in suggesting guidelines for development of public policy in relation to community. The relationship between social capital and the family, education, ethnicity, democracy, health, happiness, crime and economic performance are considered in this working paper. International comparative data is used to evaluate social capital in Australia. To clarify the sometimes cloudy meaning, our review suggest four principles for measuring social capital; distinguish between structure and content, specify the arena or area of activity to which a measure applies, specify the level of aggregation at which the measure applies and assess the net benefit of social capital empirically. We explored policies for strengthening community in Australia and the UK. Studies of both local area initiatives and proposals at the national level are considered. Issues of governance are discussed in relation to the application of policy to communities and the review concludes with some suggestions for further research.
Since 1996, recipients of unemployment-related welfare payments in Australia have been subject to a review process when their payment spell duration reaches 9 months. This review process is both a monitoring and counselling device: payment recipients are required to provide details of job search activity, while the payments administrator (Centrelink) provides job search advice and assistance. Using Centrelink administrative data over the period 1995 to 2000, this study examines the effects of these reviews on exit from unemployment-related payments. Limitations of the administrative data - in particular, the absence of information on the review process and the nature and precise timing of the review for each recipient - constrain the choice of empirical method. We therefore use duration analysis methods - specifically, estimation of empirical hazards and hazard models - to indirectly infer the impact of the review. Two alternative empirical approaches are taken. The first compares the hazard rate at the 9-month spell duration with hazard rates at 'nearby' spell durations. The second approach exploits a policy change which occurred in March 1996, when the review timing changed from 12 months to 9 months spell duration. For this approach, we compare the 9-month hazard rate in the post-March 1996 period with the 9-month hazard rate in the pre-March 1996 period. We do not find compelling evidence of a substantial or significant effect of the 9-month review using either of the empirical approaches.
This paper reports on an analysis of life satisfaction data collected as part of the first wave of the Household, Income and Labour Dynamics in Australia (HILDA) Survey. More specifically, the clustered nature of the HILDA sample was used to test the role of neighbourhood effects in accounting for inter-personal differences in self-reported life satisfaction scores.
A regression model predicting individual differences in life satisfaction was developed and tested for men and women separately. When this model was estimated allowing for fixed neighbourhood effects (based on the Census Collection District in which a sample member resides), strong support for sizeable effects were found. Indeed, observable individual and household characteristics (such as age, sex, employment status and household income) were only found to account for about 12 to 14 per cent of the variation in measured life satisfaction. Of the variance unexplained, close to 10 per cent could be accounted for by unobserved differences across neighbourhoods.
While identifying the presence and magnitude of neighbourhood effects proved to be relatively straightforward, determining the source of these neighbourhood differences is a very different matter. Essentially, these neighbourhood effects can arise either because individuals in the same neighbourhood tend to behave similarly because they face similar environments or have similar characteristics, or because the behaviour of individuals is affected by the behaviour of other residents of the neighbourhood. Some evidence was uncovered to suggest that the latter type of effect might be relatively more powerful in explaining differences in life satisfaction. Unfortunately, this conclusion is tentative at best, with measurable neighbourhood characteristics only found to have a relatively small impact on the overall explanatory power of the regression models.
Melbourne Institute Working Paper No. 23/2003
Income Distribution in Discrete Hours Behavioural Microsimulation Models: An Illustration of the Labour Supply and Distributional Effects of Social Transfers
by
John Creedy, Guyonne Kalb and Rosanna Scutella
September 2003
The distributional implications of an extreme hypothetical reform of the Australian tax-transfer system are examined using the Melbourne Institute Tax and Transfer Simulator. This simulation model predicts labour supply using a probabilistic discrete hours approach. The analysis of the distribution of income is difficult because, even for a small sample with a modest range of labour supply points, the range of possible combinations over the sample is extremely large. This paper demonstrates the use of a pseudo income distribution, where the probability of a particular labour supply value occurring (standardised by the population size) is used to refer to a particular position in the pseudo income distribution. The superior performance of the pseudo approach compared to using the expected income or taking 10 draws from the possible set of distributions is clearly illustrated by the simulation example for sole parents, in which the whole social security system is abolished. The example shows further that even if sole parents could move freely into the labour force, they do not manage to compensate fully for their loss of income when no benefit payments are available.
This paper summarises a large project involving many studies to evaluate the effects on employment and unemployment in Australia of macroeconomic, wage restraint, taxation and social security systems, and of education and training policies. One set of studies finds that the NAIRU is an uncertain estimated number, others suggest a number or a range of long term equilibrium unemployment rates, and by implication the lower bound to achievable non-inflationary unemployment rate is uncertain. Simulations with the TRYM, MONASH and VAR models find that stimulatory macroeconomic policies and wage restraint policies increase employment in the short run. Simulations with the MITTS and VAR models, and comparisons of employment experiences across countries, find that changes in tax and social security systems, as they alter incentives, affect labour supply and job search decisions, and employment.
Recent studies have examined tax policy issues using labour supply models characterised by a discretised budget set. Microsimulation modelling using a discrete hours approach is probabilistic. This makes analysis of the distribution of income difficult as even for a small sample with a modest range of labour supply points the range of possible labour supply combinations over the sample is extremely large. This paper proposes a method of approximating measures of income distribution and compares the performance of this method to alternative approaches in a microsimulation context. In this approach a pseudo income distribution is constructed, which uses the probability of a particular labour supply value occurring (standardised by the population size) to refer to a particular position in the pseudo income distribution. This approach is compared to using an expected income level for each individual and to a simulated approach, in which labour supply values are drawn from each individual’s hours distribution and summary statistics of the distribution of income are calculated by taking the average over each set of draws. The paper shows that the outcomes of various distributional measures using the pseudo method converge quickly to their true values as the sample size increases. The expected income approach results in a less accurate approximation. To illustrate the method, we simulate the distributional implications of a tax reform using the Melbourne Institute Tax and Transfer Simulator.
This paper tests a set of hypotheses relating to agency and Schumpeterian views on how competition affects performance. A survey data set of Australian workplaces is used, with the change in labour productivity growth as the dependent variable. The results show strong support for the idea that intense competition raises productivity growth in managerial workplaces, but not in non-managerial workplaces (i.e. where the principal owner also works). Testing the agency theories in more detail we find no evidence that the number of competitors, the price elasticity of demand or a proxy for bankruptcy (pre-tax losses) are the mechanisms behind the process. For non-managerial workplaces the results indicate support for the idea that greater demand uncertainty reduces productivity growth. In contrast, for managerial workplaces greater demand uncertainty tends to raise productivity growth.
We examine income and expenditure distributions over the last two decades using Australian Bureau of Statistics unit record data, presenting both nonparametric kernel density estimates and summary measures of the distributions. Standard errors of summary measures are also reported to facilitate assessments of the statistical significance of inferred distributional changes. The results show that there was a significant increase in private income inequality over the 1980s and 1990s, with most of the increase occurring by the early 1990s. However, the increase in dispersion for disposable income was modest, implying taxes and transfers acted to mitigate the increases in inequality emanating from changes in private income. Using a semiparametric procedure developed by DiNardo, Fortin and Lemieux (1996), we examine the effects on the distribution of private income of changes in the family type composition of the population and changes in the distribution across families of employment, educational attainment and number and ages of dependent children. We find that half of the increase in private income inequality is explained by changes in these characteristics. Changes in the distribution of work across families - for example, an increase in both two-earner families and no-earner families - were the single most important source of the increase in private income inequality, with such changes on their own accounting for half the increase in inequality. Changes in the family type composition of the population also acted, to a lesser extent, to increase inequality. Changes in demographic characteristics (the age, education and country of birth composition of the population) acted to reduce income inequality, while changes in the distribution of the number and ages of dependent children across families had no effect on income inequality.
Concerns have been expressed about the reliability of income and expenditure data from Australian Bureau of Statistics surveys for those on low incomes. This paper analyses the factors behind the apparently low incomes recorded by many Australian households, in particular, in major ABS data collections, and the implications of these for income distribution and 'poverty' analysis. The paper seeks to identify the extent to which these arise from the concepts of income used in these surveys, which may result in the data being inappropriate for other analysis; and the degree to which it can be ascribed to inadequate reporting of incomes. The paper draws some conclusions about how the existence of such problems should be treated in income distribution and related poverty analysis, and whether any specific actions should be taken by analysts to derive data appropriate for the purposes of their analysis. It also considers some methodologies that can be adopted to reduce the impact of any identified problems in future data collections.
Demographic issues, particularly related to the labour force participation ratio, in the Intergenerational Report and in policy options influencing welfare to work decisions over the next 40 years are discussed.
The assumption behind discrete hours labour supply modelling is that utility-maximising individuals choose from a relatively small number of hours levels, rather than being able to vary hours worked continuously. Such models are becoming widely used in view of their substantial advantages, compared with a continuous hours approach, when estimating and their role in tax policy microsimulation. This paper provides an introduction to the basic analytics of discrete hours labour supply modelling. Special attention is given to model specification, maximum likelihood estimation and microsimulation of tax reforms. The analysis is at each stage illustrated by the use of numerical examples.
It is widely assumed that non-standard employment arrangements, and especially casual employment, involve employment conditions that are inferior to more traditional employment arrangements. This paper uses data from the first wave of the Household, Income and Labour Dynamics in Australia (HILDA) Survey to examine this issue. Specifically, data on job satisfaction are used to proxy job quality. These data suggest that workers do not necessarily see non-standard employment as undesirable. First, workers on fixed-term contracts are found to be much more satisfied with their jobs than other workers. Second, the lower levels of job satisfaction among casual employees are restricted to those working full-time, and even then the size of the effect is only marked among men.
This paper asks whether the high rates of both unqualified tradespeople and attrition of qualified tradespeople from trade work necessarily represent inefficiencies in the skill acquisition process for the skilled trades. We argue that it is possible that there are three streams of trade workers - a lower stream, which requires the least academic and vocational skills and embodies short and flat experience profiles; a higher stream which demands more academic and vocational expertise and steeper experience profiles and a third, more traditional trade stream which lies in-between. This view is supported by persistent patterns in tradesmen's career paths. Polarisation into the highest and lowest streams appears to be increasing over time. If valid, these findings suggest that there should be several tiers of training for the trade labour markets.
This paper presents results for five separately estimated sets of employment and wage equations. The New Zealand working-age population is divided into sole parents, single men, single women, married men and married women. The results for the wage equations are as anticipated and similar to the results in other countries. A higher education level, living in a city and age (up to the early forties) increase the expected wage. Wages also differ significantly across industries and occupations. Employment follows the expected patterns as well, where women with children are less likely to be employed; education increases the employment probability; and living in remote areas decreases employment. In addition to the usual variables, unemployment affects the probability of employment negatively and a clear upward time trend is observed for sole parents, living with one's parents decreases the employment probability of singles but increases the probability for sole parents, and the change in the age of eligibility for the New Zealand Superannuation seems to affect the employment decision.
This paper presents the main findings from a study of six industrial capabilities in leading Victorian sectors. The capabilities included manufacturing, design, information and communications technology (ICT), biotechnology, environment technologies and business services. Eighty-eight companies and organisations were interviewed for the study. We found that the main requirements for the successful creation of a capability was the ability of the company to recruit and retain the best graduates from universities and technical schools, the ability to offer training to these graduates and the ability to financially support high and consistent levels of R&D over time. The main requirement for the successful use of a capability was effective company networking, conducive work cultures, supportive government regulations and the provision of complementary specialised training.
There have been considerable changes in the industrial relations landscape in Australia over the past 15 years. This paper utilises a recent survey of large Australian organisations to investigate the characteristics of the organisations that have embraced the industrial relations reform agenda. We find evidence that certain industries, such as Mining, have embraced the reform agenda. We also find that organisations who have embraced the reform agenda tend to have rather different human resource management practices to those who have not.
This paper develops a model to analyse the Australian health insurance system when individuals differ in their health risk and this risk is private information. The Australian system involves mixed public and private health insurance with private insurance both duplicating and supplementing public insurance. We show that, absent any other interventions, the Australian system implicitly transfers wealth from those most at risk of adverse health to those least at risk. When considered over society as a whole, these transfers represent a mean preserving spread of income, creating social risk and lowering welfare. We refer to these implicit transfers as anti-insurance. Further, we use comparative statics to show that a decline in the take-up of private insurance may lead to a reduction in the welfare of all members of society. Increased take-up of private health insurance may be Pareto improving. We consider the recently introduced rebate on private health insurance and show that this alleviates this welfare reducing anti-insurance. However, its ad valorem nature distorts insurance premiums. We demonstrate that a lump sum rebate could achieve the same reduction in anti-insurance while avoiding additional dead weight losses. Nonetheless, we conclude by suggesting that more significant reform of the Australian system is needed, for example by moving to a system of supplementary private health insurance.
This paper uses the Melbourne Institute Tax and Transfer Simulator to examine the effects of the New Tax System introduced in Australia in July 2000. First the whole set of changes is studied and then some of its components are discussed separately. From the results it is clear that the change in income tax rates and thresholds had the largest effect, because it affected a large proportion of the population whereas the changes to the benefit system are only relevant to smaller groups. Families with children benefited on average most from the changes, firstly through the changes in income taxes and secondly through the changes in Family Payments. However, families with children were also more likely to experience a loss indicating a wider range of positive and negative outcomes for this group.
This paper provides some preliminary analysis regarding the pattern of trade marking by Australian firms using financial information on large Australian businesses from IBISWorld, and matching this with intellectual property information from IP Australia. Existing businesses that have not historically trade marked in every year are now starting to make greater use of trade marks, at least over the period 1995 to 2000. The increase in trade marking appears partly related to other innovative activity in that there is a positive and significant relationship between trade mark counts and patent counts. There is also some evidence that uncertainty surrounding returns on investment has an influence on whether, and how much, firms trade mark. Overall, however, these factors are insufficient to explain the rapid rise in trade mark activity. Instead, the rise has been driven by changing managerial strategy with respect to intellectual property (IP). One possibility for this change is an increasingly competitive environment between firms with IP being increasingly relied upon.
This paper compares attitudes and perceptions to industrial relations reform between senior management at large Australian organisations on the one hand, and their associated workplace managers on the other. We find that significant differences exist in the opinions and policies of workplaces and enterprises. In particular, marked differences exist in the attitudes towards human resource management and industrial relations reform. These results suggest that we may conclude that in terms of human resource management and industrial relations it appears there is no corporate culture that is carried over from head office to the workplace
One of the major emerging macroeconomic problems during the century has been the tendency for inflation to accelerate under prolonged periods of full employment. According to Isaac (1977) and Kaldor (1996, 5th Lecture), this arises from the process of wage determination common to most western economics. They argue that there are three major objectives of wage earners that are in competition with one another. First, the desire to maintain relativities; secondly, the desire to have a ‘fair’ share of companies profits; and thirdly, a reluctance to allow any encroachment on achieved standards due to unfavourable (exogenous) events. If companies have differing rates of profit then the first objective will conflict with the second. If there are adverse changes the terms of trade, then the third objective will cause inflation. This paper tests how well the three objectives of wage earners cited above in the context of their power to effect these objectives, explains wage inflation in Australia using a times series of micro wage rate rates for detailed occupations and industries for the period 1989 to 2000. We find that wages are sensitive to the three major objectives, but not occupational unemployment rates.
This paper investigates the forces that lead some firms to engage in more innovative activities than others using a survey of 360 large Australian firms. Many earlier studies on the determinants of innovation followed the Schumpeterian tradition, and focused on size and market structure as possible causes of innovativeness, however with the event of new qualitative measures of industry knowledge and managerial styles, these factors have been found to be less important. The results of the present study show that external factors and generic routines common to all industries, such as the extent of learning, knowledge spillovers, appropriability and managerial approach are more important than industry specific forces. Foreign owned companies were also found to be more innovative, other things considered.
In recent years, analyses of neighbourhood externalities have grown with the perceived importance of their influence upon outcomes. Despite this growth, a clear understanding of the role of neighbourhoods in determining outcomes remains elusive. Various attempts have been made to quantify the role of neighbourhoods and limit problems of misspecification that have plagued this literature. Recent research suggests that neighbourhood proxies that measure characteristics similar to the dependent variable may better capture neighbourhood externalities. We explore variation in estimations including distinct neighbourhood proxies by estimating the influence of neighbourhood externalities upon youths' education expectations. Misspecification tests for normality and heteroscedasticity show particular neighbourhood proxies are more susceptible to misspecification. Monte-Carlo experiments show these neighbourhood proxies are also more likely to produce biased estimates if particular family characteristics are not fully captured. We find estimations including neighbourhood proxies measuring characteristics proximate to youths' education are less likely to suffer misspecifications. We also find that different geographic definitions of neighbourhoods can lead to erroneous findings, particularly considering variation in school quality.
This paper presents a Bayesian assessment of the likelihood of unit roots in the unemployment rates of 16 OECD countries. Bayesian techniques for detecting multiple structural breaks in time series have recently been developed by Wang and Zivot (2000). I apply these tests to a data set recently analyzed by Papell et al (2000). I also treat the number of structural breaks as an additional parameter to be estimated. I fin virtually no support for unit root hysteresis in OECD unemployment rates; this result is very robust to the choice of prior.
This paper examines the relationship between disability and labour market outcomes, and between disability and dependence on welfare in Australia in recent years. It contains three components. The first component (Section 4) uses the public-access unit record files from the ABS Survey of Disability, Ageing and Carers conducted in 1998 (SDAC98) to describe the incidence and composition of disability in 1998 and to present descriptive statistics on the relationship between disability and labour market and welfare outcomes in 1998. In the second component (Section 5), regression analysis is employed to examine the relationship between disability and labour market outcomes and welfare dependence in 1998, also using the SDAC98. The third component (Section 6) examines trends over time in these relationships using descriptive statistics drawn from the SDAC98, the unit record files of the 1993 ABS Survey of Disability, Ageing and Carers (SDAC93) and Commonwealth Department of Family and Community Services (FaCS) administrative data for the period 1980-2000.
This paper uses a recent panel data set from New Zealand to examine the link between academic performance and the decision of teenagers to leave school. These choices have significant lifetime economic impacts, since early school leaving in many cases closes pathways to further education. We address the potential endogeneity and error correlation of academic performance and later school-leaving choices. The results show that schooling decisions largely represent personal choice, and that they are influenced by factors that are at work for a long period of time. Personal ability, parental education and income during early and later childhood years influence the demand for education, exerting their influence directly and through academic performance. These results point to the role that academic performance could play in breaking cycles of disadvantage.
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