Better harnessing Australia’s talent:
five facts for the Summit

by Nicole Adams, Dan Andrews, Jo Auer, Elyse Dwyer, Zach Hayward, Greg Kaplan, Gianni La Cava, Alexandra Michielsen and Matt Nolan

28.08.2022

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Summary

As the Australian economy normalises in the wake of the turmoil of 2020 and 2021, our attention is shifting to the headwinds that constrained growth in living standards before the pandemic. The Jobs and Skills Summit must confront these headwinds and identify a policy mix that can better harness Australia’s talent to foster broad-based wage growth in the post-pandemic world.

 

After twenty years of declining educational standards, as well as recent disruptions to migration flows, Summit discussions will rightly emphasise the importance of growing our supply of workforce skills. But reforms to education policy can take a long time to reap benefits and there is no guarantee that changes to migration policy can rapidly return Australia to pre-pandemic rates of immigration.

 

Summit discussions should therefore focus not only on growing our stock of workforce talent, but on allocating our existing talent more efficiently. Our future prosperity depends as much on getting the right skills to the right workers, and the right workers to the right firms, as it does on our country’s total supply of skills. Doing so requires a policy environment that fosters the emergence of productive firms to create economic value, and then supports and incentivises workers to effectively match with the right jobs, so that this value can be harvested. This means a focus on policies that can:

  • Reduce frictions in product markets, such as impediments to firm entry and competition, to allow productive firms to thrive and create quality job opportunities.

  • Reduce frictions in labour markets so that workers can better capitalise on job opportunities, poorly matched workers can find the right jobs, and the unemployed have the necessary support to find high-quality job matches

These policy priorities are supported by a detailed analysis of micro data underlying Australian labour and product markets, which we summarise through five facts that Summit participants should have at the front of their minds.

Fact 1 Household income growth and firm productivity growth have slowed

Fact 1 is a reminder of the slowdown in both household income growth and firm productivity growth that we have seen in the Australian economy over the past decade.

Fact 2 Market dynamism has declined and remains low

Fact 2 is a series of indicators that together suggest this slowdown is partly due to rising barriers to the emergence of productive firms and the efficient matching of workers to these firms. Firms are entering and exiting less frequently; firms are older than in the past; labour and product markets are more concentrated; market leaders are more likely to remain leaders; and fewer workers are switching jobs. Together, these trends are known as `declining market dynamism’ and encompass the various ways that entrepreneurs and workers have become less likely to experiment, such as by starting high-growth firms and moving to better matched and higher paying jobs. Declining dynamism can lead to a greater share of economic opportunities and wealth being concentrated among market leaders, with adverse consequences for productivity growth.

Fact 3 Wages are becoming decoupled from firm performance

Fact 3 is a decoupling of Australian workers’ wages from the performance of the firms they work for. The share of productivity gains that are passed through to workers has declined by 25 per cent over the past 15 years, with the largest declines in retail trade, accommodation, and food services.

Fact 4 Dynamic markets benefit most workers

Fact 4 emphasises that workers benefit when labour and product markets are dynamic. We show that productivity and wages have decoupled the most in sectors where firms have aged the most and job churning has declined. With fewer new firms and new jobs around, incumbent employers can make less attractive wage offers to retain their staff. And when workers switch to jobs that are a better match for their skills, they experience large earnings gains and a boost to reported mental health.

Fact 5 With dynamic markets comes costs of job displacement

Fact 5 cautions that although market dynamism is in the interests of workers, taking advantage of dynamic markets often entails periods of job displacement and uncertainty. This can involve significant costs for households – in terms of forgone earnings, consumption, and mental health. For workers that are most at risk of job displacement, the most important outside option is unemployment benefits, whose value has fallen relative to wages over the last three decades. Low unemployment benefits can discourage these vulnerable workers – typically the young and those in casual or part-time jobs in hospitality and retail trade – from initiating transitions to jobs that better utilise their skills.

Erecting barriers to economic change is not the solution. Rigidity and frictions in labour markets exacerbate wage stagnation and prohibit young Australians from taking maximizing the returns to their talent. Instead, policy should carefully manage the costs of job displacement. This will ultimately improve wage growth and enhance the political feasibility of reforms that foster market dynamism.

Our analysis raises two questions for policymakers:

  • What reforms to product and labour markets are necessary to restore Australia’s lost economic dynamism?

  • Is our social safety net fit to incentivise workers to move to better job opportunities and insure workers when they are displaced from jobs? 

A Jobs and Skills Summit that tackles these questions – in addition to the usual skills agenda – could clear the path to broad-based prosperity via higher productivity and wage growth.