I INTRODUCTION CoPS/Impact undertakes: • applied economic research mainly in the area of economic modelling; • consultancies in Australia and other countries mainly involving the creation and application of economic models; • publication of books, reports and articles documenting its research; and • teaching of applied economics to advanced undergraduates and the supervision of post-graduate research students. After a brief history of CoPS/Impact, this report describes the activities of the unit for 1997 and the first half of 1998. The report covers: research activities; staff and graduate students; the GEMPACK software; training courses; publications; the weekly workshop; and the unitÕs finances. History The Impact Project started in 1975 as part of the Industry Assistance Commission (now the Productivity Commission). In 1978 Impact moved to the University of Melbourne and in 1991 it moved to Monash. In 1993 it became part of the Centre of Policy Studies. Throughout this eighteen year period, the Project was directed by Professor Alan A. Powell and financed mainly by the Commonwealth government. The ProjectÕs principal achievements were the ORANI model of the Australian economy and the Gempack programs for the solution of economic models. ORANI was used extensively by government and business in Australia and was the subject of several hundred papers and reports. Versions of ORANI have been created for many countries. Gempack programs are used by economic research units in about fifty countries. It has had a profound effect on economic modelling by reducing computational difficulties and facilitating communication between modellers. A feature of Impact since its inception is openness. This includes complete public documentation of its research, and the provision of training programs in the use of economic models. The present incarnation of the Centre of Policy Studies dates from the appointment in 1991 of Professor Peter B. Dixon as director. His previous appointment had been at the Institute of Applied Economic and Social Research at the University of Melbourne. He was accompanied to the Centre by several of his I.A.E.S.R. colleagues. Professor Dixon had been part of the original Impact team and he and his colleagues had maintained a close research connection with the Project during their period at the I.A.E.S.R. 1 The move to Monash of both the Impact Project and the group from the I.A.E.S.R. led to a productive merger in 1993 under the directorship of Professor Dixon. As with the original Impact Project, CoPS/Impact is devoted to the creation and application of economic models and associated software. In the tradition of the Impact Project, CoPS/Impact remains dedicated to openness. 2 II CURRENT RESEARCH (a) the MONASH model Since 1993, CoPS/Impact has developed MONASH, a dynamic model with both forecasting and policy capabilities. It is a major advance over ORANI which was limited to answering comparative static questions, i.e. questions of the form: ÒWhat will be the effect on the output of motor vehicles after five years of a reduction in tariffs?Ó. MONASH not only answers this question but also provides a basecase forecast of motor vehicle output, i.e. a forecast of the level of motor vehicle output after five years in the absence of a tariff reduction. MONASH forecasts incorporate a wide variety of information including: macro forecasts from the Treasury and other macro analysts; export volume and price forecasts from the Australian Bureau of Agricultural and Resource Economics; forecasts of tourist numbers from the Bureau of Tourism Research; forecasts of tariff rates from the Productivity Commission; and forecasts of changes in technology and consumer tastes derived from trends calculated at CoPS/Impact. Using this information the model generates forecasts for 112 industries. These can be transformed into forecasts for 341 occupations, 56 regions and many types of households. The initial applications of MONASH were made for State and Commonwealth government departments which required detailed employment forecasts. The model continues to be used for this purpose. However in the last eighteen months the main enhancements to the model have been directed at policy analysis. This has lead to papers on: • the effects of changes in the tariffs on motor vehicles and on textiles, clothing and footwear; • the effects of reforms in the coal industry; • the role of water in the Australian economy; • the effects of reductions in waterfront costs; • the implications of a more open airline policy; • the implications of financing by different types of taxes a major project such as the undergrounding of electricity and communication cables; and • the effects of a reduction in the number of foreign students coming to Australia caused by the Asian economic slowdown. A feature of the results in all these papers is their dependence on the underlying forecasts. For example, the paper on motor vehicles shows that further reductions in protection will generate an increase in the economy-wide rate of technological progress. This result depends on our forecast that export-oriented industries (that gain from tariff cuts) will have relatively high rates of technological progress. Such results could not be generated with comparative static (non-forecasting) models such as ORANI. 3 (b) labour market forecasts A skilled and adaptable workforce can play an important role in enabling Australia to compete in the world economy and to achieve sustained employment growth. However, if the potential of the workforce is to be realised, the skills provided by the formal education and training sector must conform in large part to the needs of industry. With this objective in mind, the Centre of Policy Studies (COPS) has entered into a major ongoing research program on labour market forecasting. To provide a useful guide for the allocation of training resources, employment forecasts must be for industries and occupations at a quite disaggregated level. On the other hand, when the disaggregated forecasts are added together, the resulting forecast for aggregate employment must be consistent with a plausible scenario for the macro economy. Hence the COPS forecasts are conducted within an economy- wide framework which integrates a macro model (to determine aggregate employment), an applied general equilibrium model (MONASH, to determine employment by industry) and a labour market extension (to determine employment by occupation). So far the development of the system has focussed primarily on the demand for labour. A particular concern has been the effect in recent years of technological and social change on the structure of the economy and the implications for future labour demand. A complementary supply side forecasting system is currently in preparation. The COPS system has been used since 1994 to provide a biannual briefing service to government agencies responsible for vocational education and training in Australia. Subscribers to this service have included the Australian National Training Authority, the New South Wales Board of Vocational Education and Training, The New South Wales TAFE Commission, the Victorian Office of Training and Further Education, Training and Employment Queensland, the South Australian Department of Employment, Training and Further Education, The Western Australian Department of Training and the Tasmanian Department of Industrial Relations, Vocational Education and Training. (c) income distribution Since the Australian Bureau of Statistics began to release unit record data from its Income and Housing Survey and Household Expenditure Survey in the mid-1980's, microsimulation has become increasingly important as a tool for analysing distributional issues in Australia. Microsimulation is distinguished from other analytical approaches in that it relies on simulating the behaviour of individual units within the society, such as persons, families or households. However changes in the incomes of individuals generally depend not only on changes that apply to them directly (such as a change in the eligibility rules for a government benefit) but also on changes that are mediated by the operation of commodity or factor markets (such as a change in the terms of trade or a change in defence spending). Hence models which depend entirely on the characteristics of individuals as a basis for simulation, and this includes most microsimulation 4 models, tend to be restricted both in the range of issues they can address and in the range of adjustment mechanisms they can bring to bear on an issue. In the light of these limitations, the Centre of Policy Studies has established a program of research designed to link microsimulation models with its well established applied general equilibrium models. In this endeavour, particular attention is being paid to the role of employment. Employment is important for distribution for two reasons. Firstly, most people receive most of their income in the form of wages, with about two thirds of gross income in Australia being accounted for by this source. Second, different individuals derive their wage income from different occupations, and the change in demand for labour of a particular type in response to some change in the economic environment may be quite different from the change in the aggregate demand for labour. For many years now the Australian economy has been characterised by a substantial amount of involuntary unemployment, and economic forecasters (including government forecasters) do not expect this