James Morley

A recent internet meme making the rounds on Facebook compares minimum wages and the prices of Big Macs in the US and Australia. The minimum wage is more than double in Australia (A$16.87 an hour versus US$7.25 an hour in the US), while the price of a Big Mac is about the same in both countries.

Despite the much higher minimum wage in Australia, unemployment rates in both countries are around 6% and the Australian unemployment rate remained at this lower level in recent years, while the US suffered from double-digit unemployment at the height of the Great Recession (the global financial crisis and its aftermath).

If the minimum wage appears to have little impact on the unemployment rate or prices (though other restaurant prices are noticeably higher in Australia, as any tourist will tell you in about 10 minutes upon their arrival in Oz), why are economists generally opposed to mandating a “living wage” to reduce income inequality?

Non-economists might assume the answer is simple: economists are pro-business. But we’re not. We’re pro-market, not pro-business.

The possibly surprising reason economists tend to oppose a “living wage” is virtue. In particular, if the goal is to reduce inequality, mandating someone else to pay a higher wage is not a particularly virtuous way to do this.

This is because it prevents an employer and potential employees from engaging in mutually beneficial exchange. At least this is how I saw it as a teenager in Canada struggling to find a summer job during a recession. My frustration with the minimum wage policy was one of the reasons I became an economist later in life.

In typical teenage fashion, I indulged in reductio ad absurdum arguments at the time, wondering why proponents of a “living wage” kept such earthly ambitions. If they truly thought such a policy would have few unintended consequences, why didn’t they propose mandating a “heavenly wage” that would allow all of us to drive Porsches through the pearly gates?

My cynicism was mostly incited by the fact that minimum wage and living wage laws cost politicians nothing (except possibly votes from small business owners). I detected a distinct lack of virtue in a costless mandate from government about what wage a high school student could work for.

If progressive politicians really wanted to be more virtuous in helping the poor and reducing income inequality, they should do something that would no doubt be very hard for them. They should listen to Milton Friedman.

Friedman, of course, opposed minimum wages because they hindered the proper functioning of markets. Instead, he argued for a guaranteed minimum income, whereby everyone (man, woman, and child) would receive a lump-sum income payment to cover basic needs (in practice, he argued for implementation of the program in the form of a negative income tax).

Because it does not restrict mutually beneficial exchange or create disincentives to work, a guaranteed minimum income is less distortionary than a minimum wage or a welfare program.

Like a welfare program, a guaranteed minimum income is costly, which is its source of virtue, but a hindrance to implementation. Friedman opposed means testing to limit who qualifies for the income payment, though a means test is probably the only way to make such a program financially viable.

However, a graduated means test could reduce the disincentives to work compared to a sudden threshold and make the program more affordable. And, in general, any increase in focus on income rather than employment status would be an improvement over most existing welfare programs in term of incentives to work.

I’ve mellowed since my teenage years in terms of my views about minimum wages (though not about “living wages”). Having also lived in the US and Australia, I can now see the problems with a very low minimum wage and some benefits of a higher minimum wage.

For example, in the US, service workers often receive tips in addition to their minimum wage (tipping is much less common in Australia). But they would clearly be better off receiving their compensation and benefits all in one payment, as they do in Australia.

And minimum wages may simply be much more politically feasible than a guaranteed minimum income, with or without means testing. As a wise friend once told me, we should never let the best be the enemy of the good.

At the same time, I recognize the typical hypocrisy of middle age in my mellowing views. Compared with when I was younger, I can now sometimes afford the higher restaurant prices in Australia. And youth unemployment in Australia is quite high and has been increasing relative to the rest of the population in recent years. It is hard to believe this is completely unrelated to a minimum wage that is close to A$20 an hour in many service industries.

Ultimately, though, I think economists of all political stripes (even Friedrich von Hayek professed to be in favour of a guaranteed minimum income) have it right that the focus in addressing income inequality should be more on progressive taxes and less on a “living wage”.

James Morley is a professor of economics and an associate dean at UNSW Business School. A version of this post appeared on The Conversation.

Geoff Harcourt and Anne Junor

Focusing on growth, the Brisbane G20 leaders’ summit has not grappled with three key issues. How much more growth can the planet survive? How can poorer nations raise their living standards to parity with the “developed” world? And within both rich and poor countries, how can a fairer distribution of the benefits of growth be realised?

The key problem of our time is the possibility of pursuing three goals simultaneously – ecological sustainability, economic development and a more equitable distribution of wealth within and among nations.

Harvard economist Stephen Marglin argues affluent nations must limit further increases in their standard of living. Priority must be given to the development goals of poorer nations and to addressing poverty in the affluent world. But even this cannot be done within present wasteful approaches to growth. A radical rethink of the foundations of economics is required.

Six economists and sociologists from Cambridge, The Hague, India, Italy and Australia debate this challenge in the December 2014 issue of The Economic and Labour Relations Review.

Macquarie economist Wylie Bradford questions the need for a root and branch alternative to mainstream economics. He argues existing theory is soundly based in a view of humanity and nature that has continually been adapted since the ancient Greeks. Bradford argues it can be adapted further to address the present circumstances.

Conversely, Shachi Amdekar and emeritus professor Ajit Singh from Cambridge University UK argue global warming mandates a new starting point for economics. The conventional self-interested individual is no basis for conceptualising what’s needed to tackle the terrible threats to human survival resulting from modern economic processes.

Andrew Fischer, from Erasmus University, Rotterdam, says poor nations can develop, even while the world economy decarbonises.

Poorer nations need to accumulate capital to reduce poverty, and Fischer explores how the “developed” world can make environmentally friendly changes in the composition of its consumption expenditure, to maintain effective demand in the world as a whole.

Stefano Bartolini, from Siena University, provides empirical evidence that declining social capital underlies rich nations’ current unsustainable economic growth. He paints a picture of isolated people in gated communities, protected by security systems, spending their leisure on over-consumption.

Bartolini provides alternative models of institutions, cities, social spaces and lifestyles, reversing the trend decline in social capital, creating benefits for both human wellbeing and the environment.

Wendy Harcourt, from Erasmus University, provides examples of academics and grass roots activists changing the ways in which communities function, building links between neighbourhoods in rich and poor countries and regions. She outlines a new community economics, based on “meshworks” – loosely connected networks of learning.

In response to the UN call for post-millennium development goals, emeritus professor Amiya Bagchi of Kolkata Institute of Development Studies proposed the following:

(i) More effective regulation of global capital, through host country requirements for local procurement and utilisation of innovations; more effective regulation of pharmaceutical patents; and closure of tax havens.

(ii) Stronger environmental protection through restriction of environmentally risky oil and mineral exploration and more public funding for research and investment in renewable resources and organic farming.

(iii) Inter-regional measures such as a global fund to support the viability of small island nations; and enforceable international conventions on asylum seekers, with maltreatment of migrants justiciable in international courts.

(iv) Intra-country redistribution through legislated minimum wages; gender equality in education and healthcare; pro-peasant land reforms, recognising women’s agrarian role; and communal models of property rights for forest-using people.

Whether or not economic theory moves beyond the utility-maximising individual, the survival of the planet is likely to depend on a new growth model based on social cohesion. The blueprints exist: the planetary risk may galvanise their adoption.

Geoff Harcourt is a visiting professorial fellow at UNSW Business School, where Anne Junor is an associate professor, deputy director of the Industrial Relations Research Centre and editor-in-chief of The Economic and Labour Relations Review. A version of this post appeared on The Conversation.

James Morley

Australian Treasurer Joe Hockey and billionaire Rupert Murdoch recently made impassioned speeches expressing their deep concern about the problem of rising inequality – the rich are getting richer, while the poor are suffering from stagnant or even declining real wages.

I was surprised when I heard about these speeches. For some reason, I had a preconceived notion that Ayn Rand’s Atlas Shrugged would have a more prominent place on Hockey and Murdoch’s bookshelves than Thomas Piketty’s Capital in the Twenty-First Century.

Some semblance of order was returned to the universe when I later read that Hockey and Murdoch were arguing that lower taxes and smaller government are the best ways to address inequality. Rand could still be proud of these highly talented and successful individuals, despite their heartfelt and possibly religious-motivated concern for the poor.

However, Hockey and Murdoch did not just provide a predictable ideological policy solution to rising inequality. They went out of their way to articulate a new and genuinely surprising economic theory as to why inequality has been increasing in the first place.

According to their theory, rising inequality is driven by the quantitative easing (QE) programs undertaken by the Federal Reserve (the Fed) in the US and some other central banks after the global financial crisis (GFC). Hockey and Murdoch believe the expansion of money supply associated with QE resulted in inflated asset and real estate prices, making the rich richer and leaving the poor behind.

This might sound plausible on the face of it and, if true, it is certainly a good thing the Fed just announced the end of QE. However, it is unlikely that inequality will suddenly start to decline because this theory doesn’t hold water.

QE has actually mitigated rising inequality, rather than caused it, because QE prevented deflation. Deflation is an ongoing decline in prices and wages which occurred in the Great Depression in the 1930s and Japan in the 1990s.

Basically, no one likes deflation, except for those lucky few people with no debt and lots of assets. The rest of us with some of both and even those with neither would have been much worse off had the GFC led the world into what macroeconomists call a “debt-deflation spiral”.

To understand this grim-sounding descent into macroeconomic hell, let’s say I borrowed $10,000 from Murdoch just before the GFC to help me buy a house. I would still owe him $10,000 afterwards, but if the crisis had led to deflation, my wages, assets and the value of the house would have fallen. So it would be much harder for me to pay back the $10,000 even if I liquidated my assets by selling my house.

I would have to cut back on my spending and save more to bring my real debt burden back under control. Meanwhile, if everyone (except Murdoch) tried to deleverage in this way at the same time, it would result in a deeper economic depression. Overall, there would be more deflation, more unemployment, and a larger increase in the real burden of debt.

This debt-deflation spiral is a pretty good description of what happened in the Great Depression and, to a much lesser extent, Japan in the 1990s. Fortunately, former Fed chairman Ben Bernanke and other central bankers facing the GFC applied lessons from the past. They didn’t tailor their policies exclusively to the needs of debt-free lenders who just want a high real return on their assets and so don’t mind deflation.

Instead, during the GFC, Bernanke and others undertook QE to stabilise inflation expectations. By avoiding deflation, QE prevented borrowers from getting poorer and lenders getting richer.

To be clear, monetary policy can have large distributional effects, but only when it leads to unanticipated deflation or inflation. For example, high inflation in the 1970s was a surprise and resulted in huge benefits for the baby boomers who borrowed to buy houses before the worst of the inflation hit.

They still owed the amount borrowed, but their wages and the nominal value of their houses went up considerably with inflation. For example, the median house price in Melbourne went up from A$12,800 in 1970 to A$39,500 in 1980 – a 200% increase over the decade, meaning the real burden of debt declined dramatically during the period. This was just the reverse of the debt-deflation spiral in the 1930s, a spiral avoided during the GFC due to the QE policies implemented.

If QE and monetary policy didn’t cause rising inequality, what did then?

Technology has shifted the nature of work dramatically during the past century from farms to factories to office buildings. It has also increased the returns to certain specialised skills and cognitive ability.

This technological change has greatly improved standards of living. However, it has left many people who do not have higher-education degrees with stagnant real wages or long-term unemployment. As a result, inequality has increased.

This skill-biased technological change has been going on for a while, as has the resulting rise in inequality. Bernanke highlighted its role in driving inequality in a speech back in 2007. By contrast, QE has only been on the scene for the past five years or so (not counting the Bank of Japan’s sporadic and generally limited forays into such policies since 2001), further undermining its potential to explain rising inequality.

But if rising inequality is due to skill-biased technological change rather than QE, what can be done?

Improving access to higher education seems like an obvious answer. But this is far from a panacea, especially to the extent that higher education serves more as a signal of high cognitive ability than it actually develops skills. We could give everyone in the world a PhD, but there would still be a lot of inequality.

Instead, fiscal policy, rather than monetary policy, can reduce inequality via progressive taxes. Fed chairwoman Janet Yellen said as much in a recent speech on inequality, targeting inheritance in particular as a source of persistent gaps in economic opportunities for the rich and poor.

Hockey may try to advocate that higher taxes kill the goose that lays the golden egg. Yet there is surprisingly little evidence of this, at least not at the level of taxes presently in place in most advanced economies. Countries with higher and more progressive tax rates have less inequality, but still grow just as fast or faster than countries with lower taxes and more inequality.

For example, despite higher taxes, Australia, Canada, and Sweden have all grown faster than the US during the past two decades.

So next time a Treasurer, a billionaire or anyone else tries to argue that QE is responsible for rising inequality and the best solution is lower taxes, I recommend being more than a little sceptical.

James Morley is a professor of economics and associate dean (research) at UNSW Business School. A version of this post appeared on The Conversation.

Richard Holden

Last Tuesday, the minutes of August’s Reserve Bank of Australia (RBA) board meeting were released. Market participants speculated about what they would say, currency and bond markets responded to what they did say about house prices and future interest rates, and the precise wording was dissected in great detail by the Australian press.

The words of central bankers such as Glenn Stevens attract a huge amount of attention. In the US, analysts have scrutinised even the body language of successive US Federal Reserve (Fed) chiefs.

It’s not surprising that what central bankers do is closely followed. After all, interest rates have a big effect on economic activity, a range of different markets and investment strategies.

But what is, at first glance, surprising, is that what central bankers say is perhaps as closely scrutinised as what they do. Of course, what they say is informative about what they might do in the future — but there’s more to it than that.

Perhaps the most striking feature about how central bankers communicate is that they are typically quite vague. This is so widespread and has become such an art form that it has been dubbed “Fedspeak”.

For example, former Fed chairman Alan Greenspan in 2005 told the US House Committee on Financial Services:

“Risk-takers have been encouraged by a perceived increase in economic stability to reach out to more distant time horizons. But long periods of relative stability often engender unrealistic expectations of it[s] permanence and, at times, may lead to financial excess and economic stress.”

Even the RBA’s comparatively plain-spoken Stevens said recently to the Australian House Standing Committee on Economics:

“At some point, if these responses start to gather pace, the sorts of forecasts we are setting out at the moment will very likely prove to be conservative. The frustrating thing is that no one can say when that will happen, or just what might be the proximate trigger.”

Why are central bankers so abstruse? Surely it would be better for them to communicate clearly. Actually, no.

Central banks have all sorts of information about the economy that investors and the general public do not. They use that information to inform future policy. So wouldn’t it be best if they could credibly communicate that information so the market could incorporate it into their decision-making as soon as possible?

Yes, but the key word here is “credible”. Imagine for a moment that a central bank could make a pronouncement that was both credible and precise. Being credible, markets would believe it. And being precise, markets would have no doubt what it meant about future policies.

But this very fact would give the central bank a reason to lie. Why? Because there is a trade-off between inflation and output (or unemployment). Different central bankers will have different appetites for how much unemployment they are willing to tolerate in order to keep inflation low.

So, as Nobel laureates Finn Kydland and Edward Prescott noted long ago, policy-makers (such as central banks) suffer from an inherent time-consistency problem. In this setting, all central bankers want to be seen to be “tough on inflation”, but then bankers with less tolerance for unemployment will still want to mimic bankers with more tolerance — so they can be believed to be tough and enjoy low inflation expectations.

But that’s a logical contradiction. So central banks cannot be credible and precise at the same time.

If you think this logic sounds complicated, airy-fairy and academic, then you are right. And wrong. It is exactly the reasoning laid out by a Harvard University economics professor in a paper in 1989 in the world’s leading economic journal, the American Economic Review. That Harvard professor, Jeremy C. Stein, later went on to become a governor of the Fed. So he’s seen theory and practice.

And his argument is perhaps more pertinent today than ever before – a time where central bankers are trying to balance multiple competing objectives with just one concrete policy instrument: short-term interest rates.

Poor Stevens is trying to juggle inflation, growth, unemployment, the exchange rate and housing prices all at the same time. He needs more than just the cash rate to do that. And to influence expectations at all he must balance the precision and credibility of his language.

What central bankers say communicates a lot more information than the interest rates they set. That’s why central bankers are so careful in their language, and masters of the art of Fedspeak.

Personally, I think Fedspeak sells the immutable economic logic behind it a little short. I prefer to think of it as “Greenspan’s uncertainty principle”. You can either know what he’s saying, or whether he really means it. But you can’t know both at the same time.

Richard Holden is a professor of economics at UNSW Australia Business School. A version of this post appeared on The Conversation.

Renee Adams

In a clever marketing move, Facebook’s finance chief Sheryl Sandberg and stock photography supplier Getty Images recently released a series of photos which represented women in “more empowering ways”.

What Sandberg, the author of “Lean In: Women, Work and the Will to Lead”, is trying to counter is the narrow range of images used to portray women, work and family – the businesswoman with briefcase, the mother with children and the one juggling both.

Society’s focus on women and work appears fixated on these kinds of stereotypes – and government policy settings are squarely aimed at them. Think paid maternity leave, tax rebates for child care, gender balance reporting requirements for corporations with 100 or more employees.

The corporate sector is required to report annually to the federal sex discrimination commissioner on diversity and gender balance (although there are moves to roll this back), but the reports are inconsistent, include data on issues that may be irrelevant for senior women (such as breastfeeding in the workplace) and often incomplete. They don’t seem to produce the desired outcome of rectifying the imbalance, especially at senior levels.

One neglected corner of the working women debate is that of female academics – the women who teach the new generation of leaders, produce valuable research and take part in what is commonly referred to as “thought leadership”.

Women have played a big role in academia (in expert opinion and research), in the arts and the not-for-profit sector, where significant contributions are too rarely recognised and rewarded.

Female academics have reached some dizzying heights. Elizabeth Blackburn won the 2009 Nobel Prize in Physiology or Medicine; Condeleeza Rice was a political scientist at Stanford before and after her time as US Secretary of State.

In finance and economics, my field, only a handful of women are at very senior levels. Janet Yellen is head of the US Federal Reserve. Christine Lagarde (in fact, a former lawyer, not an academic) is managing director of the IMF.

Yet their input is essential. Not simply to contribute a “female” perspective on economic issues, but because women represent over half the world’s population and should be heard in every debate that impacts on their livelihood.

Women are plentiful at the lower levels of academia but they get stuck there and rarely advance to professor. It is a lonely field and a lot of women feel very isolated. In many jobs, there is paid leave to support women who take time off to care for sick children. In academia, when your time is effectively your own, the flexibility is often envied. But time off eats into research, reduces publication rates and limits promotion possibilities.

An academic job for a woman is different to an academic job for a man. Community-wide expectations that women will be represented on all boards or working parties have created a situation where women at very senior levels spend large parts of their time in meetings and other activities that take them away from their research and, by extension, their prospects of promotion.

And no matter how many programs there are to support women’s advancement, women still shoulder the largest part of the childcare and home responsibilities.

Women can also hinder themselves by their own attitudes. Senior women should not be waiting around for the right male mentor to come along, but they do need support to network and create their own opportunities.

If we want to have women at the most senior levels, taking part in decisions that impact on the nation’s and the world’s economy – or carrying out research that influences those decisions – they need funding for networking and mentoring programs. And they need support at the broadest possible level, not just within their own institutions.

Federal and state governments should take some responsibility for supporting women who want to help themselves to become senior opinion leaders and researchers. By funding formal mentoring programs, networks and fellowships, governments would be acknowledging the fact that universities are incubators of ideas that have far-reaching implications.

Women spend too much time chasing the money for these programs instead of doing the productive work of research, teaching and supervising PhD students.

The private sector is reluctant to contribute without a clear benefit – they need a return on investment. The not-for-profits can’t afford it. Universities are living in straitened times.

Formal mentoring programs for female academics in finance and economics currently exist in the US, UK, China and Canada, but receive little support in Australia.

At the Australian School of Business at UNSW, there are programs to support women but the benefits of senior academic women spread far wider than the campus.

Low numbers of women in the field have flow-on effects in business. Harvard Business School Dean Nitin Nohria recently apologised for his school’s treatment of female students and professors, promising to double the number of case studies in which women are portrayed as central leaders in business problems.

Sometimes perception is part of the problem. Women need to put themselves in the centre of the picture, or the business problem.

To do that they need to connect with other women, share success stories, get access to conferences, fellowships and other opportunities.

Renee Adams is the Commonwealth Bank Chair in Finance at the Australian School of Business. A version of this onion piece appeared in The Conversation.

Rafal Chomik

Since its proposal at a 1910 conference, International Women’s Day, which we celebrated last week, has served as a reminder of the role of women in society and the struggle for equality.

The most commonly debated element of this struggle relates to balancing child care and work. Policy makers have responded with various measures.

In Australia and elsewhere even cuts to parental benefits are justified on the basis that they are aimed to help parents, particularly single mothers, into work. The recent introduction of paid parental leave for fathers and partners is intended to help parents become more equal in balancing work and family. And in courting women’s votes for the upcoming federal election the Coalition has pledged to take the issue further by proposing to extend paid maternity leave.

But another area of unpaid work in which women overwhelmingly participate involves care for people with disabilities and the elderly. Australian Bureau of Statistics data on unpaid care shows that women comprise 68 per cent of primary carers overall, 92 per cent of primary carers of children with a disability, 70 per cent of primary carers of parents, and 52 per cent of primary carers for partners. It translates to 1.5 million Australian women acting as either primary or secondary carers.

The benefit of this unpaid work is considerable. One set of recent estimates puts the value of unpaid care by both women and men at $650 billion – equivalent to 50.6 per cent of GDP.

But carers often bear the cost of their unpaid responsibilities. Informal care is associated with lower levels of formal employment, higher risks of poverty, and a higher probability of mental health problems.

Unpaid primary carers are half as likely to be participating in the labour force as non-primary carers. And when they are employed, they are twice as likely to be in part-time work and 30 per cent more likely to hold a temporary job. These impacts increase with hours of care provided.

Of course, the care involved may be incompatible with a full-time job or there may be a level of ‘self-selection’ into the role of unpaid care-giver by those who had lower market opportunities in the first place. But analysis shows that even controlling for such socio-demographic variation, informal carers are less likely to be in paid employment.

Lower employment rates, fewer formal working hours, and fewer household members with earnings can mean that unpaid carers have a higher probability of experiencing poverty. Women carers appear to be particularly vulnerable to such a risk. Moreover, less work and lower earnings during their working life translates to lower savings and incomes in retirement.

The psychological distress and isolation of caring and the lack of support are possible reasons why unpaid carers in Australia are shown to have a 40% higher rate of mental health problems than non-carers. Again, even controlling for socio-demographic characteristics shows that informal caring is associated with more mental health problems and that the impact is more detrimental for women. Being the recipient of a carers’ allowance does not seem to alter the negative impact on mental health in Australia.

With an ageing population the demand for informal care is only going to increase. Indeed, the Productivity Commission sees such care as an integral part of the Australian aged care system. At the same time, the Commission points to the likely reduction in availability of informal care due to demographic and motivational factors. Yet, most informal care is low intensity, with 55% of informal carers providing 0-9 hours of care. Such figures suggests that with the right level of support there is scope for some carers to increase their hours of care with limited impact on work and mental health outcomes. So how do we design support systems for informal carers that avoid the negative impacts?

The Australian government has started putting various measures in place. It developed a National Carer Strategy as a framework to address the economic, educational, and health needs of informal carers.

While flexible work for women with children has been on the agenda for a while, only recently has care responsibility across the life-course been recognised. Last month, the Prime Minister announced that the Fair Work Act will be amended to extend the right to request flexible working to carers – it was already available for those caring for children.

As ever, there is more that can be done. In January, the Sex Discrimination Commissioner, Elizabeth Broderick, released a report calling for a series of possible reforms to support unpaid carers including legislative mechanisms, flexible work arrangements, carer support payments, leave arrangements, services for carers, workplace initiatives and mechanisms within the retirement income and savings system.

Investing in unpaid carers would mean not only relieving pressure from the formal aged care system and improving the quality of care for recipients, it would also go some way to redress this particular area of gender inequality.

Rafal Chomik is a Senior Research Fellow at the Arc Centre of Excellence in Population Ageing Research at UNSW.

Rafal Chomik

The phenomenon of population ageing is often summarised in a simple ratio. Known as the dependency ratio, it measures the proportion of those of traditional working-age (15-64 years) to those above it (65 years and over). In Australia, as in most other countries, this dependency ratio is on the increase, having risen from 15% in 1980 to 20% in 2012. By 2050 it is expected to reach 36%.

Yet who we consider to be of traditional working-age can change over time. Arguably more important than the dependency ratio is the proportion of people actually in the labour force supporting those who aren’t.

For example, despite the rising proportion of older people, Australia’s total labour force participation rates have increased over the last few decades, from 61% in 1980 to 65% in 2012, driven by greater numbers of women working. Women still have some way to go to catch up with men. But even as that happens, if we wish to offset the declines in total participation that result from population ageing, we need some of the older people to remain in the labour force.

Many older people already want to work longer but encounter barriers to doing so. The barriers and incentives that lead to their inactivity come at a high cost of foregone potential. In a briefing paper on the trends and prospects for mature-age labour force participation, co-written with Professor John Piggott at theCentre of Excellence in Population Ageing Research, we estimate this cost to be around $30 billion, or 2.4% of GDP in 2012.

Besides dismantling mature-age employment barriers related to health, discrimination, and skills, there are some key institutional issues that government can tackle. These result from the carrots and sticks that make up the tax, benefit and retirement income system.

The most important of these are the three ages at which pension income can be accessed: 55 (increasing to 60) for superannuation access; 65 (increasing to 67) for age pension access; and 60 for tax-free superannuation benefits. These can be thought of as two sticks and a carrot.

Australia is increasing the access ages for the two sticks. But the access age for tax-free superannuation has been left untouched at 60. As Professor Piggott has noted before, “once the standard superannuation age reaches 60, in 2024, the carrot will have lost its crunch”.

These levers are not only more amenable to policy intervention, but also appear to have a greater impact. When New Zealand increased access to its pension from 60 to 65, mature-age participation rates shot up much faster than in Australia, and now stand considerably higher; 76% for those aged 55-64 compared to Australia’s 53%. A key explanation is that New Zealand doesn’t rely on a widespread superannuation scheme, which in Australia can be accessed much earlier.

But to what extent can we push for longer working lives? Some, such as my fellow contributor to The Conversation, raise concerns about leaving older people to the ravages of the labour market. There is indeed evidence that for mental health outcomes, a bad job can be as bad as or worse than inactivity.

Still, the quality of jobs in Australia is not necessarily worse than in other advanced economies. For example, the incidence of temporary contracts among 55-64 year olds, a key indicator of job insecurity, stands at 4.6% – about half the rate of the OECD average.

Indeed, there doesn’t seem to be a relationship between a country’s mature age participation rate and incidence of mature-age mental health issues. While Belgium has one of the lowestparticipation rates of 55-64 year olds in the OECD of 36%, Sweden has one of the highest, at 76%; yet both have the same incidence of mental health problems among 55-64 year olds.

It is important to remember that population ageing takes time. And society, as well as the labour market, can change and adapt over time. We know from health and education data that today’s older people are much better off than in the past. And looking at labour market data shows that while the proportion of unemployed 55-59 year olds who have been looking for a job for more than 12 months is at 34%, twice that for 25-34 year olds, this rate has declined more than for any other age group over the last decade.

Should labour markets become more turbulent and we find that older people increasingly struggle to engage with employment, then addressing labour supply and demand barriers seems more fitting than to simply retire them. The latter response is a mistake made in the past in the now familiar story across the OECD in the 1980s, of retrenchment and labour market exit of older workers to apparently make way for the young. This was in line with the debunked logic that there is only a certain number of jobs to go around.

Ever since the baby boomer generation, we have been redefining the timing of key life events. It is likely that later labour market entry, later marriage, child-bearing, and longer, healthier lives, will mean longer productive lives too. With the right mix of policy intervention, baby boomers who are now entering the age brackets of “traditional retirement age” may well redefine what that means too. And if they do work longer, then the “tsunami” of population ageing represented by an increasing dependency ratio will be no tsunami at all.

This opinion piece was previously published on The Conversation as part of their ‘Shades of Grey’ discussion portal  under: It’s time to redefine the traditional working age.

Les Hems | CSI Blog

In April last year I wrote in The Conversation about an innovative financial investment mechanism called Social Impact Bonds, that was designed to address some of society’s wicked problems by engaging government agencies, not-for-profit organisations, private investors and financial institutions.

At that time only one of these SIBs was operating in the United Kingdom. After what seems to have been a long pause, the increasing levels of interest and rhetoric have turned into some tangible products, including here in Australia.

In the last weeks two new SIBs have been launched in the United States – one in New York and the other in Massachusetts. Meanwhile in NSW, three SIB propositions are now under negotiation.

The most interesting aspect of these new initiatives is how the basic SIB concept developed in the UK has been adapted in different jurisdictions.

As I have explained in my previous story, the way a SIB works is by a bond-issuing organisation raising capital from investors, based on a contract with government, to deliver improved social outcomes that generate future government costs savings.

As well as repaying the principal, investors are paid a reward if the agreed outcomes are achieved.

The growing interest in SIBs is driven by a number of factors. Firstly, Governments are developing long-term outcomes focused “payment by results” or “payment for success” mechanisms to replace inefficient and ineffective mechanisms such as contracts, fee-for-service or grant-in-aid mechanisms.

Secondly, not-for-profit organisations are increasingly focused on delivering long-term social impact. However, many not-for-profit organisations are “permanently failing” – with demand for services outstripping supply, they are under-capitalised, use a short term revenue funding model, and rarely use debt finance.

Thirdly, investors of all shapes and sizes are increasingly seeking to achieve an appropriate balance between commercial returns and the social and environmental value created.

There is now a shift from ethical and socially responsible investing – based on screening out investments associated with social and environmental damage – to social impact investing where commercial returns are blended with the creation of social and/or environmental value.

This shift chimes with Professors Michael Porter and Mark Kramer’s vision of creating shared value.

SIBs offer the potential to harness these three drivers and re-engineer the traditional relationships between government agencies, not-for-profit (NFP) organisations and investors to create social benefit

Given this positive analysis it might have been safe to assume that first UK SIB focusing on recidivism would be rapidly replicated in other jurisdictions and across other policy fields.

However, the UK experience showed it takes a long time to develop a SIB proposition and measuring success is not only complex, but absolutely essential in order to find a point where all partners will agree to proceed.

The first UK SIB is reportedly progressing well and is on schedule to deliver the target outcomes.

But it’s most striking attribute is that it is an “all-at-risk” investment; where the failure to achieve the target reduction in recidivism leads not only to investors losing the reward payment for use of their capital, but also losing the principal.

Government has therefore achieved a complete transfer of risk to the private investor – although it has to be acknowledged that it is difficult to assess risk in such an innovative mechanism.

It is therefore unsurprising that all the investors in this innovative mechanism are philanthropic institutions – trusts and foundations – which can rationalise the downside risk as a donation as well as a failed investment.

Trusts and foundations traditionally use the financial returns on their investments to provide grants with the goal of achieving social value. The SIB mechanism offers them a mechanism to also use their corpus to achieve social value. However, if accessing commercial investment capital is a SIB goal, then arguably the UK SIB has failed.

The deal was formulated by a specialist intermediary – Social Finance; they hold the contract with government to deliver the agreed outcomes and are responsible for the ongoing management of the SIB.

Social Finance sub-contract the delivery of the intervention programs to a number of not-for-profit organisations. Finally, the reward payment and repayment of the investors’ capital will come from an innovation fund rather than the mainstream service delivery budgets.

The New York SIB is also in the field of recidivism, but with some significant adaptations to the original UK SIB, particularly around the nature of the risk sharing and the involvement of a commercial investor.

For instance, in the NY SIB, the prime investor is investment bank Goldman Sachs, along with with Bloomberg Philanthropies – the charity of New York major Michael Bloomberg – which is providing a credit guarantee that limits losses to a quarter of the invested capital. A further adaptation is a research centre – the MDRC – is coordinating the delivery of the recidivism program.

In Massachusetts, two “payment-for-success” based initiatives are under development which relate to recidivism and homelessness.

At this stage it is not clear what structures may be used, but it is interesting to note that the process is being driven by government and is following a traditional procurement process.

This is also the case with the Social Benefit Bond (aka Social Impact Bond) trial in NSW.

Three proponents are now involved in a negotiation process and while the full details aren’t known, at least one proposition includes two mainstream financial institutions, another involves a specialist intermediary, and all three have on-board very large not-for-profit organisations.

An overarching conclusion is that in these early stages, social impact bond propositions will need more “trials” to better understand stakeholder behaviour as well as how to optimise incentives.

In these early stages the costs of the measurement and research must also be borne outside of the SIB mechanism, or else transaction costs will undermine their financial viability.

In the UK there are a range of institutions and funding sources, including BIG Lottery, NESTA and Big Society Capital. In the US, President Obama established a fund of US $100 million to develop “payment for success” mechanisms.

But in Australia there are no similar sources of funding to support measurement, research and development. If SIBs are to become more widely used here, this is a significant gap that has to be remedied.

This article was previously posted on The Conversation and on the CSI Blog under: Will social impact investing finally pay dividends?

From the Knowledge@Wharton today blog.

We’re entering the next big wave of corporate social responsibility. At least that’s how Daniel Korschun, a Drexel University marketing professor, sees it.

The first wave of corporate social responsibility, known as CSR, was embodied in people like Sir Titus Salt, a British textile baron who improved conditions for workers toiling in what were then known as “dark satanic mills,” Korschun noted during a panel at this year’s Wharton Social Impact Conference. Salt brought them out of the economic darkness by providing housing, health care and a better way of life.

The second wave came during the 20^th century with the growing debate in corporate America over whether CSR should be considered an essential piece of good management or just a marketing tool to garner favor from communities, he said.

Today, “the debate is over,” noted Korschun, who acted as moderator of a panel focusing on innovation in corporate CSR. “We’re seeing the third wave of CSR, and companies are trying to incorporate CSR into the business model. That’s putting the onus on companies and management to find ways to innovate. It’s no longer enough to be somewhat engaged.”

Indeed, panelists at the session talked about how deeply involved companies have become with regards to giving back to society, either through philanthropy or sustainability efforts, and how far they still have to go in this effort.

Catherine Potter, a senior associate at consulting and management company Green Order, spoke about the environmental reality check her company has been able to provide to a client roster that includes General Electric, Pfizer and DuPont. GreenOrder focuses on how environmental innovation can actually make businesses more competitive and profitable, she said. “We’ll be the first to tell them, ‘Don’t just go … green for green’s sake.’ It should be rooted in business value.”

Building an enduring and effective sustainability platform, she added, takes many steps, but companies first have to understand what their core business model is, how they make money and how environmental sustainability plays into that. When clients come to GreenOrder, it’s usually the CEO who has bought into the idea of promoting green, “but the rest of the team thinks it’s hooey.” Yet buy-in at all levels is critical for making it work, Potter noted.

One example of a company that’s gone all in, she said, is General Electric, which GreenOrder has been advising since 2004. The multinational conglomerate, a global manufacturer of  everything from lighting to wind turbines, was able to cut more than $130 million in yearly energy costs while reducing greenhouse gas emissions and water usage.

Agencies in the public and private sector are coming to realize that CSR is not just about newfangled technology, but about changing behavior. For example, Potter pointed to utility clients who put in smart meters and devices for consumers to track energy usage. “It’s not going to work if you don’t engage people and figure out how to change their behavior,” she noted, adding that companies need to do more outreach to customers and make sure they have the information needed to form a realistic action plan.

Action is exactly what Chhavi Ghuliani, another speaker during the session, wants from all the players when it comes to environmental and social change. Ghuliani is a manager in advisory services for BSR, a consulting and research firm that works with 300 member companies all over the world to develop sustainable strategies for organizations, including everything from health education programs at a Bangladesh factory to creating green initiatives at a news organization.

In the past, Ghuliani said, companies viewed community investing and philanthropy as more important for brand recognition and boosting employee morale than for figuring into their core business operations. But today, it’s beginning to be seen more holistically. For example, he noted, BSR has completed a project with Bloomberg News to define what sustainability means, and was able to define what types of goods the company should be procuring to keep facilities running properly, while also focusing on what was the most sustainable. “As a result, Bloomberg saved $25 million in costs, but [the effort] also positioned them to be leaders in sustainability,” he added.

Figuring out which organizations are leaders in CSR, and which are falling behind, was another area BSR recently tackled by launching a new data service that compares CSR efforts among companies. Looking at two companies and comparing their energy efficiency is one example of this, noted Ghuliani.

This blog was previously posted in Knowledge@Wharton today blog: Corporate CSR: What It Means to Go ‘All In’

Peter Shergold | CSI blog

In a previous blog I talked about the importance of qualitative attempts by nations to measure the good life.  It was courageous, I thought, to write about statistics.  Today I’m going to address the issue of integrated reporting.  Braver still, I suspect.  I risk becoming the boring bloke who stands between you and the drinks fridge at a party.

I do so because the issue is fundamental to how companies measure, and report upon, their ability to create and sustain value – not just economic and financial but social, environmental and governance factors.  It’s an idea whose time has come.  Below the radar, the reporting framework for companies is set to change.

I sit on the board of a publicly-listed company.  I know, having to read every page, how long, detailed and complex the Annual Report has become.  Much of its arcane nature is driven by regulatory requirements.  Presentation of strategy tends to get lost behind dense technical jargon.

It’s hard to tell our story in an engaging and informative manner to our shareholders, policyholders and stakeholders.  The narrative gets buried in the voluminous financial statements and their detailed explanatory notes.  Like many companies we end up employing workarounds, providing an alternate measure of ‘underlying profit’ that we believe is a better measure of our corporate performance over time.  The financial reporting predominantly looks backwards:  non-executive directors like myself are only too well aware that discussing future prospects gives rise to potential legal liabilities.

Company reporting, then, tends to be extensive but partial.  It is commonplace that documents on corporate citizenship, social responsibility or sustainability are issued separately from the Annual Report.  The measures of performance are then selected from a widening array of reporting vehicles – from the Global Reporting Initiative framework to the London Benchmarking Group.  This gives rise to three problems.

First, it perpetuates the belief that the reporting measures of societal or environmental value may be chosen to present a company’s performance in the best light.

Second, it suggests that community benefit or sustainability initiatives are simply well-meaning (or self-serving) bolt-ons to the real business of the business presented in the Annual Report.

Third, as Helen Brand, the President of the Association of Chartered Certified Accountants has blogged, “Presenting the information separately, in silos, makes it difficult to build up an overall picture of a business’ long-term value …  We need an integrated approach to reporting.”

Thankfully, a move is underway to do just that:  to streamline company reporting, reduce its costs and – most importantly – provide a clearer picture of organisational performance.  The International Integrated Reporting Committee (IIRC) was set up in 2010 by a large group of distinguished corporate, regulatory, academic and civil society leaders to design a more comprehensive but flexible reporting framework.

The IIRC’s mission is to find ways to better communicate the total value that companies create.  To do so it is necessary to make transparent the six ‘capitals’ on which a company depends (financial, manufactured, human, intellectual, natural and social) and to explain how they are assessed and deployed in a strategic manner.  Among the guiding principles of integrated reporting are the connectivity of information, its future orientation, stakeholder inclusiveness and commitment to conciseness, reliability and materiality.

According to Goran Tidstrom, President of the International Federation of Accountants (and a member of the IIRC), “Financial information is not sufficient.  We have to provide information on sustainability, on social issues and environment, and it has to be done in an integrated way with a financial report.”  Here’s how.

Social capital reporting is meant to recognise a company’s social licence to operate, including the corporate values and behaviours that prevail;  how relationships are conducted with customers, suppliers and business partners;  and the extent to which the business enhances individual and collective wellbeing.

Natural capital reporting is intended to exhibit how a company’s activities impact, positively or negatively, on the ecosystem – water, land, minerals, forests and biodiversity. 

Human capital reporting is designed to capture the alignment of a company’s ethical values and governance framework including, for example, how human rights are recognised.

The IIRC has now issued a comprehensive Discussion Paper on its ambitions.  It’s a good read.

The good news is that some Australian innovators are not waiting.  The new cooperative bank, bankmecu, has already announced that it is to work with the Net Balance Foundation to develop an integrated reporting framework for its 2011-12 Annual Report.  At the bigger end of town NAB’s Annual Report for 2011 already includes a significant section on corporate responsibility as an integral part of its business strategy.

Accounting and applied statistics can seem to be dull disciplines.  The truth is that unless we can measure and report upon the value of social and environmental good created by companies effectively, the momentum for them to create ‘shared’ economic and societal value is likely to slow.  That, at least, is my perspective.  I’d welcome your views.

Peter Shergold is the Macquarie Group Foundation Professor at the Centre for Social Impact (CSI) at UNSW. This blog post first appeared on the CSI blog.