This chapter sets out the extensions to the basic model outlined in chapters 2, 3 and 4 made by the Productivity Commission to assess the Impacts of COAG Reforms (PC, 2012).
This background to the extensions and the equations in the VURM TABLO implementation are described under the following section headings:
7.1 Cohort-based demographic module
7.2 Linking government consumption to the cohort-based demographic module 7.3 Labour supply by occupation
7.4 Export supply
7.1
Cohort-based demographic module
As described in chapters 2 and 4, the standard model has a rudimentary modelling of demographic change. It stylistically incorporates the three main sources of demographic change by region:
net natural increase (i.e., births less deaths);
net foreign migration (i.e., immigration less emigration); and net interstate migration (i.e., interstate arrivals less departures).
These changes are read in from the model database for each simulation year and are adjusted to account for changes applied as shocks in the preceding simulation year.32 For example, the annual increase in the Australian population in the 2005-06 database is just over 300 000 people per year. This means that, unless the corresponding change variable (d_pop_g) is shocked, the population in all subsequent years will increase by just over 300 000 people. Suppose that a shock of 50 is applied to d_pop_g (signifying an increase of an additional 50 000 people), then the population in the following year, and in all subsequent years, would increase by 350 000 (i.e., 300 000 plus 50 000). This approach could be extended by using an external demographic model to calculate the required changes to the demographic variables. The Productivity Commission adopted this approach in modelling the potential benefits of the National Reform Agenda (PC, 2006).
To overcome the need to link VURM to an external demographic model, VURM5 incorporates a fully operational cohort-based demographic model with age, gender and region (state) cohorts to allow for more realistic modelling of policies with a longer-term focus and those that impact on, or are influenced by, demographic characteristics, such as ageing of the population and changes in fertility and mortality rates and foreign migration. This approach also allows for feedback effects between sources of demographic and economic change (such as the effect of wage differentials on interstate migration).
32 As the model database is based on the ABS input-output tables for the financial year 2005-06, a simulation year effectively corresponds to a financial year.
7.1.1 Background
The new demographic module is based on a series of demographic modelling tools developed by the Productivity Commission. These tools were initially developed for its study into the Economic Implications of an Ageing Australia (PC, 2005a) and have subsequently given rise to:
a spreadsheet MoDEM demographic model (Cuxon et al. 2008) that was used in modelling the Potential Benefits of the National Reform Agenda (PC, 2006);33 and a spreadsheet model of fertility called FERTMOD (Lattimore, 2008) that was used in
Recent Trends in Australian Fertility (Lattimore and Pobke, 2008).
The new demographic module in VURM extends the national demographic relationships in MoDEM to the eight states and territories (hereafter referred to as regions).34
All demographic modelling adopts numerous simplifying assumptions that make the demographic accounting tractable. The assumptions made in the new demographic module are generally those adopted in FERTMOD and/or MODEM. These assumptions are similar to those made by the ABS in its demographic projections of the national population.
7.1.2 Outline of the new demographic module Basic structure
The new demographic module models the effect of demographic change on subsets of the population based on age, gender and region (referred to as ‘cohorts’). This makes it a ‘cohort component’ model. It uses a ‘stock–flow’ approach to calculate regional populations by age and gender. The 2005-06 database consists of the estimated resident population (ERP) for 1 616 cohorts as at 30 June 2005. Each cohort represents a unique combination of:
101 age groups: 100 single year age cohorts — 0 years old to 99 years old — and an open ended 100 years and over cohort;
two genders: male and female; and
eight regions: New South Wales, Victoria, Queensland, South Australia, Western Australia, Tasmania, the Northern Territory and the Australian Capital Territory.35
The age, gender and region cohort data that underpin the 2005-06 database for the new demographic module is sourced from the ABS Census of Population and Housing (ABS 2009a).36 The database is discussed in more detail in appendix B.
In each simulation year, the number of people in each age, gender and region cohort changes according to:
the net inflow through overseas migration (i.e., immigration less emigration);
33 The version of MoDEM referred to in this documentation is version 2.0.
34 In the demographic module, state or region refers to state-of-residence unless otherwise stated.
35 The model database does not include Other territories — Jervis Bay, Christmas Island and Cocos (Keeling) Islands — which the ABS also includes in the estimated resident population (ERP) for Australia. This means that the total population in the demographic model database is less than the official Australian ERP published by the ABS.
36 The database also takes into account changes in the population in 2005-06 attributable to the ‘intercensal variation’, which arises from ex-post adjustments made by the ABS to reconcile its population projections with those flowing from the official Census of Population and Housing.
the net inflow through interstate migration (i.e., interstate arrivals less departures); deaths, and
births for the group aged ‘0 year olds’ (figure 7.1).
People who do not die or leave the region are one year older by the end of the simulation year and join the next age cohort. This approach is similar to that used by Penec (2009).
The new demographic module is linked into the model core to determine population, working-age population and labour supply. The module is expressed in level terms and adopts the practice in VURM of reporting all population and labour market variables in thousands of people.