Australians’ love of housing means RBA rate decisions usually come with a strong focus on the implications for mortgage repayments and house prices. But this month was different. On Tuesday, coverage of the RBA’s decision to decrease the cash rate was surprisingly concentrated on something else – Australia’s sluggish productivity growth.
Productivity growth in Australia averaged 2 per cent and higher over the 1980s and 90s, but has been steadily decreasing since. Growth fell to a little over 1 per cent in the 2010s before plateauing in recent years, with today’s productivity level largely unchanged from the level in 2018. This led to the RBA downgrading their productivity assumption on Tuesday from 1.0 per cent to 0.7 per cent. The Treasurer’s Budget rests on a much rosier assumption of 1.2 per cent.
While productivity often sounds like a nebulous concept, declining productivity growth matters – it is the main driver of increasing real incomes in the long run, while a return to Federal budget balance in 2035-36 is premised on much higher productivity growth.
It’s against this backdrop that the Government has put together the Economic Reform Roundtable (originally announced as the Productivity Roundtable). While this has reinvigorated the galahs in the pet shop among us, it provides a serious opportunity for policymakers to consider the significant economic challenges facing Australia and potential areas for reform.
A key factor in Australia’s declining productivity is its declining dynamism. A dynamic economy is one that is able to allocate its resources – labour, capital and land – to their best uses. But, as e61’s report on the Policy Priorities for the Economic Reform Roundtable points out, Australia’s economy has become less dynamic over time. Australia has seen declining firm entry and exit, increasing industry concentration, and declining labour mobility.
Dynamic and flexible labour markets ensure that workers find jobs that best match their skills and preferences. e61 research highlights their benefits, with workers who switch jobs on average seeing pay $5,700 higher than those who do not switch. These benefits are higher for young workers.
Dynamic markets also allow high potential firms to grow, re-allocating labour from lower to higher productivity firms. e61 analysis also shows that workers who switch jobs move to firms 13 per cent more productive than the ones they leave, though this reallocation effect has more than halved since the mid-2000s.
But, despite the current tight labour market and low unemployment rate, job switching remains near record lows, as part of a longer-term structural decline. This suggests that structural barriers could be putting ‘grit in the wheel’ of the labour market and our economy.
What are some potential structural barriers?
There’s a range of potential suspects: increasing use of non-compete clauses may be limiting workers ability to move, while RBA research has found occupational licencing is associated with slowing the flow of workers from less to more productive firms. There has also been an increase in industrial regulation in recent years, such as through the ‘Same Job, Same Pay’ legislation and introduction of multi-employer bargaining.
While each of these policies have a particular goal in mind, they can have unintended – and sometimes intended, but detrimental – consequences. Policymakers need to consider these trade-offs, and whether secondary impacts that limit wages and growth are acceptable trade-offs to achieve the stated goals.
So, what can policymakers do to improve labour market dynamism?
The Government has begun consulting on reforms that look to remove the burden of non-compete clauses for some workers. In a similar vein, e61’s two-page submission to the Economic Reform Roundtable recommends consideration of decreasing occupational licencing requirements, in particular only keeping necessary standards. The Productivity Commission estimates this would boost GDP by at least $5.2 billion. Improved harmonising of occupational licencing between states and territories, and improved recognition of international qualifications and licenses should be considered.
It would also be beneficial for industrial relations reforms to be back on the table. Just like the ‘Abundance agenda’ the Government has picked up and is starting to run with on housing and environmental regulations, it’s likely that not all labour market regulations are achieving their aim, and they come with trade-offs.
Firms play an important role in the economy too – they are owned by people, employ people, and (directly or indirectly) serve people. However, analysis and policy discussion often bypasses their role, including in driving productivity growth.
International research highlights the importance of young and high potential firms in driving growth, as opposed to small firms which policy predominantly focus on. Allowing firms to fail and exit is also highlighted as an important contributor. Future e61 work will investigate how these dynamics play out in Australia, and how they may have contributed to the observed slowdown in dynamism.
