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Productivity Commission Research Report Business Regulation and VET Volume 3 – VET April 2012 Commonwealth of Australia 2012ISBN 978-1-74037-400-2 (Set) 978-1-74037-397-5 (Volume 1) 978-1-74037-398-2 (Volume 2) 978-1-74037-399-9 (Volume 3) This work is copyright. Apart from any use as permitted under the Copyright Act 1968, the work may be reproduced in whole or in part for study or training purposes, subject to the inclusion of an acknowledgment of the source. Reproduction for commercial use or sale requires prior written permission from the Productivity Commission. Requests and inquiries concerning reproduction and rights should be addressed to Media and Publications (see below).This publication is available from the Productivity Commission website at www.pc.gov.au. If you require part or all of this publication in a different format, please contact Media and Publications. Publications inquiries: Media and Publications Productivity Commission Locked Bag 2 Collins Street East Melbourne VIC 8003 Tel: (03) 9653 2244 Fax: (03) 9653 2303 Email: maps@pc.gov.au General inquiries: Tel: (03) 9653 2100 or (02) 6240 3200 An appropriate citation for this paper is: Productivity Commission 2012, Impacts of COAG Reforms: Business Regulation and VET, Research Report, Volume 3 – VET, Canberra.JEL code: 128, J44, J45 The Productivity Commission The Productivity Commission is the Australian Government’s independent research and advisory body on a range of economic, social and environmental issues affecting the welfare of Australians. Its role, expressed most simply, is to help governments make better policies, in the long-term interest of the Australian community. The Commission’s independence is underpinned by an Act of Parliament. Its processes and outputs are open to public scrutiny and are driven by concern for the wellbeing of the community as a whole. Further information on the Productivity Commission can be obtained from the Commission’s website (www.pc.gov.au) or by contacting Media and Publications on (03) 9653 2244 or email: maps@pc.gov.au Terms of reference Impacts and benefits of COAG reforms Productivity Commission Act 1998 I, Nick Sherry, Assistant Treasurer, pursuant of Parts 2 and 3 of the Productivity Commission Act 1998 hereby request that the Productivity Commission undertake reporting on the impacts and benefits of COAG reforms.Purpose of the study The Council of Australian Governments (COAG) is committed to addressing the challenges of boosting productivity, increasing workforce participation and mobility and delivering better services for the community. This reform agenda will also contribute to the goals of improving social inclusion, closing the gap on Indigenous disadvantage and improving environmental sustainability. At its March 2008 meeting, COAG agreed that, to assist the COAG Reform Council in its role of helping to enhance accountability and promote reform, and monitoring the progress of the COAG reform agenda, the Productivity Commission (the Commission) would be requested to report to COAG on the economic impacts and benefits of COAG’s agreed reform agenda every two to three years. In doing so, the Commission should be guided by COAG reform objectives and goals identified in the Intergovernmental Agreement on Federal Financial Relations, COAG communiqués and related documents, particularly as they relate to addressing the challenges stated above. The reporting will cover, as appropriate, the realised and prospective economic impacts and benefits of the different reform streams, including regulation, infrastructure and human capital issues of workforce productivity and participation. Each report to COAG will give priority to informing governments of the nature of reform impacts and benefits and the time scale over which benefits are likely to accrue, given COAG’s reform framework and implementation plans. Where information about specific reform impacts or initiatives is limited, the Commission’s reporting would produce broad or ‘outer envelope’ estimates of the potential benefits and costs of reform. The reporting program should enable governments to have up-to-date information with which to evaluate what has been achieved through the reform agenda and provide an assessment of potential future gains. Scope of reports Each report should cover reform developments, impacts and benefits in each COAG reform area. At the commencement of each reporting cycle, the Assistant Treasurer will provide directions concerning particular reporting priorities to be addressed within this broad framework. Without limiting the scope of matters to be considered, determination of reporting priorities could take into account: the fiscal impact of reform on each level of government the availability of new material on COAG’s reform agenda or implementation plans the implementation of a significant body of reform over a sufficient period to enable a meaningful review of the likely impacts and benefits of that reform TERMS OF REFERENCE III any emerging concern about the potential impacts or benefits of a reform.The Commission’s reports to COAG should provide information on: the economic impacts and benefits of reform and outcome objectives, including estimates of the economy-wide, regional and distributional effects of change assessments, where practicable, of whether Australia’s reform potential is being achieved and the opportunities for improvement. The analysis should recognise the different nature of sectoral productivity-based and human capital reforms and the likely time paths over which benefits are likely to accrue.In preparation for its inaugural full report, the Commission should also provide a ‘framework’ report to COAG outlining its proposed approach to reporting on the impacts and benefits of COAG’s reform agenda. Methodology The Commission will develop and maintain analytical frameworks appropriate for the quantification of the impacts and benefits of reform, and the provision to government and the community of assessments of the economy-wide, regional and distributional effects of COAG’s reform agenda. The frameworks should be transparent, and subject to independent assessment. As far as practicable, the frameworks should be made available for wider use. The Commission should provide an explanation of the methodology and assumptions used in its analysis. The Commission should also provide guidance concerning the sensitivity of results to the assumptions used and bring to COAG’s attention informational limitations and weaknesses in approaches to reform evaluation. The scope for improvement should be identified. Consultation and timing In the course of preparing each report, the Commission should consult the COAG Reform Council, relevant Ministerial Councils, any relevant COAG working groups, Commonwealth Ministers, State and Territory Treasurers and more widely, as appropriate. While these consultations would inform the Commission’s assessment, responsibility for the final report would rest with the Productivity Commission. The Commission’s framework report should be submitted to COAG by 31 December 2010. The Commission will then complete full reports at 2-3 year intervals dated from 1 January 2009, in accordance with directions for individual reports from the Assistant Treasurer. Final reports will be submitted by the Productivity Commission to the Assistant Treasurer for conveyance to COAG. The Assistant Treasurer will advise the Commission of the timing for individual reports. The reports will be published. Nick Sherry Assistant Treasurer [Received 18 June 2010] TERMS OF REFERENCE IVLetter of direction Dear Mr Banks I am writing to you regarding priorities to be addressed in the Productivity Commission’s first report on the Impacts and Benefits of COAG Reforms. I apologise for delay in providing these directions to you. In December 2010, I received the Commission’s framework report, which proposed that the first substantive report include a detailed analysis of the impacts of reform in the competition and regulation stream and the human capital stream. For the first report, I agree that the Commission should examine areas of COAG’s competition and regulation stream likely to have realised or prospective impacts. The COAG Reform Council assessed the progress of the deregulation and competition reforms as at 30 September 2010 in its National Partnership Agreement to Deliver a Seamless National Economy: Performance Report for 2009-10. I consider that the Commission’s report should focus on the 14 completed deregulation reforms (pending COAG’s agreement to the completion of the food reform), the Personal Property Securities and Occupational Health and Safety reforms which are scheduled to be operational by 1 January 2012, and the National Construction Code reform which is substantially complete (see Attachment A for a numbered list of these all of these reforms). Taking into account the longer term nature of the implementation of many of the competition reforms, I agree with the Commission’s proposal that these be considered in more depth in the second or later reports. I also consider that the remaining deregulation reforms should also be examined at this time. Under the human capital stream, I endorse the Commission’s proposal that the impact of education and training reforms be examined in detail in its first report. I ask that the Commission focus on the impacts of reforms to vocational education and training on productivity and workforce participation. Initiatives that support young people and disadvantaged groups in making a successful transition from school to further education, training or employment should also be examined by the Commission as part of this analysis. I note that the Commission does not propose to provide an estimate of the realised and prospective economic impacts and benefits of all the different reform streams. While I appreciate the rationale for not doing so in this first report, this is an area that I would appreciate greater focus on in future reports. The terms of reference that were provided in June 2010 asked the Commission to report to COAG on this matter by 31 December 2011. However, in view of the delays in providing these directions, I have extended the time for the Commission to provide COAG with its report from 31 December 2011 to the end of March 2012, with a discussion draft to be provided in December 2011. LETTER OF DIRECTION VThis letter has been copied to the Prime Minister, the Deputy Prime Minister and Treasurer, the Minister for Finance and Deregulation, the Minister for Tertiary Education and the Minister for School Education. Yours sincerely BILL SHORTEN [Received 22 August 2011] LETTER OF DIRECTION VIAttachment A — Reforms to be focused on 14 completed deregulation reforms Health workforce (Deregulation reform stream 5 in the CRC report) Trade measurement (Reform stream 6) Trustee corporations (Reform stream 10) Standard business reporting (Reform stream 19) Wine labelling (Reform stream 25) Rail safety (Reform stream 19) Australian consumer law (Reform stream 8) Product safety (Reform stream 9) Phase 1 of Consumer credit (includes 3 separate reforms; reform streams 11, 12 and 13) Payroll tax (Reform stream 3) Development assessment (Reform stream 4) Food (Reform stream 20)2 reforms scheduled to be operational by 1 January 2012 Personal Property Securities (Reform stream 18) Occupational Health and Safety (Reform stream 1)1 reform that is substantially complete National Construction Code (Reform stream 15) ATTACHMENT A VIIExtension Letter Mr Gary Banks AO Chairman Productivity Commission PO Box 1428 Canberra City ACT 2601 Dear Mr Banks Thank you for your letter dated 15 March 2012, seeking an extension to the reporting date for the Productivity Commission study Impacts of COAG reforms: Business Regulation and VET. I note that further time is needed to enable consideration of late submissions and finalise detailed modelling of reform outcomes. Accordingly, I agree to your request to extend the reporting date for the study from 31 March to 30 April 2012. I have copied this letter to the Prime Minister. I look forward to receiving the report in due course. Yours sincerely DAVID BRADBURY [Received 23 March 2012] VIII EXTENSION LETTERContents Terms of reference III Letter of direction V Attachment A — Reforms to be focused on VII Extension Letter VIII Preface XIII Acknowledgments XIV Abbreviations and explanations XV Overview 1 What the Commission was asked to do 3 The COAG VET reform agenda 4 The Commission’s approach 6 Assessment of reform impacts 11 The Commission’s analysis of youth transitions 19 Achieving effective VET reform 20 1 Introduction 23 1.1 Request to the Commission 24 1.2 What the Commission was asked to do 24 1.3 The Commission’s approach to youth transitions 26 1.4 The COAG reform agenda — VET and transitions 26 1.5 Key policy initiatives assessed 31 1.6 Related Commission publications 32 1.7 Structure of the report 33 2 Assessment framework for the COAG VET reforms 35 2.1 The conceptual framework 35 2.2 Potential distortions in the VET market 38 CONTENTS IX2.3 Key concepts used in the Commission’s analysis 42 2.4 Estimation approaches 46 2.5 Two other features of the Commission’s analysis 49 3 Impacts of COAG reforms 59 3.1 The importance of assumptions 59 3.2 Results of previous research 62 3.3 Overview of results 64 3.4 Market-oriented reforms in Victoria 67 3.5 National Partnership Agreement on Productivity Places Program 72 3.6 Market-oriented reforms in South Australia 75 3.7 Foundation skills 77 3.8 Potential reform effects 79 3.9 Effects of contestability on the quality of VET outcomes 91 3.10 Youth transitions 93 4 Opportunities for further gains 95 4.1 Information available to students 95 4.2 The quality of student outcomes 97 4.3 Completion rates 99 4.4 The importance of sequencing to successful policy initiatives 101 A Benchmarking results from this report 103 A.1 Background 103 A.2 Minor differences in overall projections 105 A.3 Decomposition of apparent discrepancy 108 A.4 Conclusion 117 B The Education and Labour Market Outcomes model 121 B.1 The modelling task 121 B.2 The modelling approach — an overview 123 B.3 A stylised version of the ELMO model 124 B.4 The ELMO model 128 B.5 Key assumptions 136 CONTENTS XC Modelling assumptions and parameter estimates 137C.1 Translation of additional training effort into completed qualifications 137 C.3 Employment and wage premiums for increased educational attainment 148 C.4 Parameters used in the ELMO model and the mature learners framework 160 C.5 Estimation results 166 D Young learners — ELMO results 169 D.1 Modelling the effects of the COAG VET reforms 170 D.2 Projected effects of COAG VET reforms 174 D.3 Projected jurisdictional effects of COAG VET reforms on employment and productivity 181 D.4 Projected occupational effects of COAG VET reforms 182 D.5 Projected social inclusion effects of COAG VET reforms 183 D.6 Sensitivity analysis 184 E Mature learner results 187 E.3 Projected effects of COAG VET reforms 190 E.4 Projected social inclusion effects of COAG VET reforms 193 E.5 Sensitivity analysis 194 E.6 Additional effects of COAG VET reforms 195 F Foundation skills attainment 205 F.1 Foundation skills in Australia 206 F.2 Why might governments intervene to improve LLN skills? 212 F.3 Foundation skills reforms assessed 214 F.4 Baseline 216 F.5 Realised and prospective impacts of policy initiatives 220 F.6 Potential impacts of reforms 226 F.7 Conclusion 231 G Youth transitions 233 G.1 Transitions data in LSAY 233 CONTENTS XIG.2 Prevalence of successful transitions 235 G.3 Validation 236 G.4 Characteristics of transition groups 238 G.5 Potential for multivariate analysis using LSAY 239 H Economy-wide modelling of VET entitlement and language, literacy and numeracy policies 245 H.1 The MMRF model 245 H.2 Direct effects 246 H.3 Results 250 H.4 Contestability 255 References 259 XII CONTENTSAbbreviations and explanations Abbreviations ABS Australian Bureau of Statistics ACPET Australian Council for Private Education and Training ALLS Adult Literacy and Life Skills Survey ASQA Australian Skills Quality Authority AQF Australian Qualifications Framework ASSDA Australian Social Science Data Archives BOTE Back of the Envelope COAG Council of Australian Governments CoPS Centre of Policy Studies CGE Computable General Equilibrium DEEWR Department of Education, Employment and Workplace Relations DEST Department of Education, Science and Training DFEEST Department of Further Education, Employment, Science and Technology DHS Department of Human Services ELMO Education and Labour Market Outcomes ESC Essential Services Commission GDP Gross Domestic Product GSP Gross State Product GST Goods and Services Tax HILDA Household Income and Labour Dynamics in Australia IBSA Innovation and Business Skills Australia ICLs Income Contingent Loans IGA Intergovernmental Agreement on Federal Financial Relations ABBREVIATIONS AND EXPLANATIONS XVLFS Labour Force Survey LLN Language, Literacy and Numeracy LLNP Language, Literacy and Numeracy Program LSAY Longitudinal Surveys of Australian Youth MMRF Monash Multi-Regional Forecasting NAPLAN National Assessment Program — Literacy and Numeracy NASWD National Agreement for Skills and Workforce Development NBN National Broadband Network NCP National Competition Policy NCVER National Centre for Vocational Education Research NEA National Education Agreement NES Non-English Speaking NFSS National Foundation Skills Strategy for Adults NPAPAT National Partnership Agreement on Pre-Apprenticeship Training NPAPPP National Partnership Agreement on Productivity Places Program NPASR National Partnership Agreement on Skills Reform NPATPSTP National Partnership Agreement on Training Places for Single and Teenage Parents NPAYAT National Partnership Agreement on Youth Attainment and Transitions NRA National Reform Agenda NWDF National Workforce Development Fund OECD Organisation for Economic Cooperation and Development PC Productivity Commission PPP Productivity Places Program PISA Programme for International Student Assessment RTO Registered Training Organisation SAL Survey of Aspects of Literacy SET Survey of Education and Training
O VERVIEWKey points Vocational education and training reforms are aimed at improving the overall quality of the workforce and encouraging higher workforce participation, through increased VET provision and greater flexibility in courses offered.– Attainment of the COAG 2020 targets has the potential to raise GDP by two per cent.– It would also assist in achieving COAG’s broader social inclusion goals. Increased effort by governments will be required for the full potential of the COAGagenda to be realised. A number of areas offer opportunities for even better outcomes. In particular:– initiatives to increase VET completion rates– ensuring VET reforms are sequenced so that the building blocks are in place for the successful transition to more contestable markets including, strengthening quality control through cost-effective independent validation and auditing of training organisations’ assessment practices making information available to students on the costs of training, quality and labour market outcomes for individual training organisations– greater autonomy and capacity for TAFEs to compete with other providers– tying payments to outcomes.IMPACTS OF COAG REFORMS — VET 2Overview What the Commission was asked to do The Australian Government — following a request from the Council of Australian Governments (COAG) — asked the Productivity Commission to report on the economic impacts and benefits of COAG’s vocational education and training (VET) reform agenda and initiatives that support successful transitions from school. In undertaking its assessment, the Commission was asked to: report on the economy-wide, regional and distributional effects of reforms take into account the costs incurred by governments in implementing reforms comment on the time paths over which the effects of reform are likely to accrue provide guidance on the sensitivity of estimated results to the assumptions used draw attention to information gaps that limit approaches to reform evaluation assess, where practicable, whether Australia’s reform potential is being achievedand the opportunities for improvement. The Commission has made many assumptions in estimating the impacts of COAG’s VET reform agenda. These are outlined in this overview and detailed in this volume. Sensitivity analysis undertaken indicates that those assumptions are critical. When the assumptions change, so do estimated changes in employment, productivity and broader economic activity, often quite markedly. The results, therefore, should be regarded as only broadly indicative of the possible impacts of policy initiatives assessed. The estimates and analysis are intended to advance understanding of the scale of effects that might occur. The estimates presented are not forecasts of the economic or fiscal impacts of the reforms. Rather, they reflect the impacts of VET policy initiatives in isolation from any other influence, including in isolation from initiatives in other parts of the education system. Consistent with the terms of reference, the results are presented relative to a baseline to isolate the effect of the initiatives modelled relative to the outcomes that would have occurred with the previous policy settings and with the demographic momentum, which means that the education of the population is assumed to be increasing independently of the COAG policy initiatives under scrutiny. OVERVIEW 3Although some results are expressed in terms of percentage changes relative to the baseline, others are expressed in terms of real values and are discounted to account for the long term effects of the initial expenditures (box 1). Box 1 Effects of discountingWhen economic flows occur over a long period, it is appropriate to discount them to account for the preference for the present. The discount rate reflects the trade-off between present and future consumption (or savings). The analysis in this report is in real terms, that is, it abstracts from the effects of inflation, and prices and wages are assumed to be measured in terms of 2012 dollars. The choice of a discount rate is complex. It depends, among other considerations, on whether the flows being discounted measure private or social, real, or nominal values. In this report, all values are expressed in real terms and both private and social values are discounted. For simplicity, a six per cent, real discount rate is applied to all values, and all values are discounted to 2012. The effect of discounting is illustrated with a simple example in which costs of studying (monetary and foregone income while studying) are assumed to amount to $20 000 in the first year and additional returns due to studying (the premium) are $10 000 per year over 40 years. A discount rate of 6 per cent is applied in table A.
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