Upskilling Workers and Lowering Tariffs: Key Lessons from the Productivity Commission Report

“Promoting Prosperity” is the title — and the hope — of the Productivity Commission’s main five-year investigative report released on Friday.

Its more than 1,000 pages include “29 reform guidelines and 71 specific recommendations”. It builds on the inaugural “Shifting the Dial” report released by then-Treasurer Scott Morrison in 2017, with few apparent results.

Here are some of its main takeaways.

Why Productivity Matters

We don’t get richer over time unless we can produce more from a given amount of resources.

The decade to 2020 has been a dismal one, with productivity growth collapsing to just 1.1% a year.

Instead of doubling production in 39 years, which would be achieved at the average rate of 60 years through 2020, it will take us 64 years to double production if we stay at the rate of the last decade. “The much-vaunted ‘4-day week’ is all the more difficult to achieve,” the report says.

Why is productivity growth slowing?

A range of factors are at play, in particular a shift in the economy (here and in other wealthy countries) towards more services.

Agriculture, mining and manufacturing tend to be easier to automate and, in the case of the latter, easier to outsource to Asia.

Australia is relatively productive internationally in agriculture and mining, less so in services.

The “non-profit” sector, mainly government, tends not to face much competition or to charge according to its costs. This part of the economy is growing, and on current trends, the share is on track to grow from a quarter now to 40% over the next 40 years.

The private sector, however, is not really a source of productivity growth. “Around 98% of Australian businesses do not produce novel innovations,” the report states.

How can the slide be reversed?

The report singles out five “pillars of reform,” including making workers more skilled and adaptable, harnessing data and digital technology, and boosting competition.

One suggestion is to expand the powers of the Fair Work Commission to allow it to revise minimum wages in rewards to “expand flexibility for many small businesses”, potentially reducing wages for some.

“[I]It is possible that under this new model, the FWC could make a change to rewards that results in gains for many workers, even if some are made worse,” the report said.

Likewise, “calibrated government intervention” is advised for the so-called gig economy. “Simply imposing employee status in all cases would effectively erode many productivity and flexibility benefits for workers,” he said, adding that compulsory basic insurance could guarantee the existence of safeguards.

Other ideas include encouraging universities to create ‘nested’ qualifications so that students who do not complete their courses can still be recognized for the studies they have completed.

Australia’s skilled migration should be overhauled so that migrants become “a vital source of new ideas and information”. To this end, the government should replace the skilled occupations lists for temporary and permanent skilled migration with wage thresholds for employer-sponsored skilled migration.

Indeed, a better-designed visa for temporary skilled workers “could reduce reliance on permanent migration (which typically involves greater fiscal risks related to the higher average age of permanent migrants)”, a- he declared. Permanent visas for business innovation and investment should also be scrapped due to “poor tax performance”.

Interventions that cause more economic distortions than they help should be stopped: import tariffs, for example, impede economic activity by $0.60 to $1.50 for every dollar of income generated. As a result, the government “should unilaterally reduce Australia’s remaining statutory import duty levels to zero”.

Climate change finally at the center of concerns

Unlike the 2017 survey, this report devotes a large part to the heating climate. “By some measures, the threat Australia faces from climate change may be greater than other major economies,” it says.

However, decarbonizing over the next three decades to reach net zero “will be a huge transformation”. The success of the transition will be “a major determinant of the standard of living of all Australians”.

The most effective would be “a single, explicit carbon price,” a policy the Abbott government scrapped in 2014.

In its absence, the report recommends extending the federal government’s safeguard mechanism beyond the more than 200 industrial facilities to include electricity generation. This move would mean that just over half of national broadcasts would be covered, roughly double the current proportion.

Any action, however, can slow down productivity. “Because the cost of carbon emissions has not been reflected in GDP or corporate profits, reduction efforts could … increase the cost of production and put downward pressure on measured productivity, at least to short term,” he said.

While calling on governments to prepare communities for worsening extreme weather conditions, the commission cautioned against certain policies. Governments, for example, should avoid expanding climate-related insurance industry interventions and set a medium-term timeline to abandon Australia’s northern reinsurance pool.

These pools “risk subsidizing the movement of individuals, households, and firms into harm’s way” by masking price signals.

Subs offer mistakes to learn

Treasurer Jim Chalmers says the government was already “advancing, in one form or another, more than two-thirds of the 29 reform directives”.

Chalmers also cited this week’s deal on nuclear submarines costing up to $368 billion as part of efforts to boost productivity. Investments like Aukus would broaden and deepen our economic base, he said.

The report happens to single out submarines as “an example of what can go wrong.” Australia’s 10 Collins-class boats cost $100 million each when they were designed in 1982, a sum that soared to $850 million in 1999. Even then, none of the five submarines in the water that year- there “did not work properly”.

“There are good reasons to rethink defense procurement, drawing on the advice of those outside of defence,” the commission concluded.