Productivity reform is welcome, but beware the traps

Anthony Albanese and Jim Chalmers. Picture: Jason Edwards

You can now listen to The Australian's articles. Give us your feedback.

You can now listen to The Australian's articles.

The government’s announced summit on growth and productivity is welcome. Policy works best when we can air competing views and harness the experience of workers, firms and community groups.

The challenge will be getting a semblance of agreement beyond boilerplate commitments to productivity growth. Concreteness will matter. So, too, a bit of give and take.

There is some reason for optimism. The “five pillars” referred to the Productivity Commission by the government are the right themes to explore. Reform can be difficult when individual policies are not win-win but a summit can promote the net gains from a larger bargain.

Our research at the e61 Institute shows even some individual reforms could appeal to a broad coalition of summit attendees.

Reforms that enable workers to match to better jobs are one example. The government’s proposal to ban non-compete clauses for lower-income workers will promote job mobility. This can benefit both worker wages and growing firms looking to hire suitable staff.

In a similar vein, reforms to occupational licensing should help workers move to where demand for their work or their personal circumstances warrant.

Workers and firms also would benefit from fewer regulations that stymie growing firms. Our tax and regulatory landscape is littered with thresholds that operate like high effective marginal tax rates on firms, rewarding firms that are small (and often old) rather than young and growing.

Analysis by e61 of firm responses to sharp payroll tax thresholds and size-based labour market regulation highlight these potential unintended effects.

But these are only a small sample of the plethora of size-based regulations firms face.

Another area with potential is the government’s backyard. The non-market sector, areas predominantly funded, delivered and heavily regulated by government, has grown significantly in the past two decades, driven by the care economy in particular. This reflects our fiscal good fortune – high commodity prices and rising labour market participation boosting government revenue.

However, this good fortune won’t last forever and the growth in the non-market sector inevitably will have to moderate. This will require tough decisions.

We need to promote quality through incentivising innovation and technological adoption, while containing cost growth. We all stand to benefit from healthier people as a result.

There are also some traps for the summit to avoid.

One is the “miracle pill” approach. Productivity policy is like diet and exercise – daily, broadbased fundamentals that show incremental benefits across time. Productivity policy operates across the broad sweep of government involvement in the economy, in fiscal programs, regulation and government service delivery.

If these are set to maximise efficiency, encourage innovation and allow new business models, then we stack the odds in our favour. If governments pursue populist or ideological departures, it is no good seeking out a quick fix.

Another danger is well-disguised rent seeking.

Jim Chalmers and Anthony Albanese rightly have put productivity front and centre in the debate.

Interest groups and lobbyists have caught on. From here on, every bit of special pleading; every bid for preferment, subsidy or select tax break will have the word productivity in the pitch. It is a recipe for the opposite.

We need to be clear-eyed and upfront about what policies are legitimately targeting productivity, rather than other social goals. Other policies aimed at equity and social inclusion should be reviewed to make sure they are targeted and fit for purpose.

Third is the risk of faux consensus. Bringing stakeholders together is worthy – getting compromise and agreement a good aim, as long as it isn’t at the expense of someone not in the room.

Even in a broadbased summit there are gaps. Usually they are the groups that are most diffuse – taxpayers, consumers, income support recipients.

One under-represented group is the dynamic, growing firms we will rely on to drive future productivity growth. Many of them do not yet exist.

Our research at the e61 Institute is focused on better understanding the outsized role that a small subgroup of young firms plays in driving innovation and growth.

Most small businesses do not fit this description, and much of what we do to support small business could actually be a barrier to high-growth firms.

The goal of the summit should be, at least, to avoid these traps and locate the policy reforms where there is a broad coalition for change. It would be great to see bargaining and progress on other issues, too.

There will need to be honest perspectives on the trade-offs involved, including for groups not represented in the room. Ultim­ately, an open conversation will promote trust in the government’s intentions to promote productivity growth and living standards.

Michael Brennan is chief executive of e61 Institute. Ewan Rankin is research manager at e61 Institute.