For once, can we do something other than labour market reform?
With Australian growth turned soggy and weak, the economy desperately needs stimulus. For better or worse, the government is likely to try to deliver that stimulus in the shape of microeconomic reform — allowing market forces greater sway in the economy, and reducing government involvement.
The RBA has given the government a hefty shove towards this, or what it calls “structural policies”. In a speech in May, RBA governor Philip Lowe begged the government not to rely on monetary policy alone. He made it very clear what he thought the government should do instead. After mentioning infrastructure spending, he zeroed in on policies that would unleash market forces.
The best option is … structural policies that support firms expanding, investing, innovating and employing people. Structural policies not only help with job creation, but they can also help drive the productivity growth that is the main source of improvement in our living standards.
If the government had not made the surplus an object of religious reverence, we could probably boost the economy through spending — a Keynesian approach. We could build some infrastructure to help keep people in jobs through the bad times.
But Treasurer Josh Frydenberg has said that’s not going to happen. “We remain absolutely committed to the surplus,” he told The Sydney Morning Herald earlier this month.
So the response to Australia’s flagging fortunes, it seems, will be microeconomic reform.
What should we expect?
Microeconomic reform has a very strong history in this country, and it can take credit for much of our current wealth. The history starts with Whitlam reducing tariffs, and hits its high point under Hawke and Keating. The Commonwealth Bank was privatised starting in 1991. Qantas was privatised in 1993, when Keating was prime minister. Centralised bargaining was out in favour of enterprise bargaining. Keating also introduced the National Competition Policy, designed to make sure Australian businesses were exposed to competition that would force them to run efficiently.
The great push in the 1990s of deregulation and privatisation lifted Australia’s economy up out of the pack to become one of the strongest in the world. But microeconomic reform is not without costs. And you need to be very careful about where those costs fall — for both economic and political reasons.
The government will likely be very tempted to go straight to labour market reform. Certain newspaper editors will cheer them on, and they will find no opposition among the business groups and associated think tanks. But trying to do more labour market reform at this time is a huge mistake.
“The supply side of the labour market is turning out to be more flexible than we had earlier expected,” RBA governor Philip Lowe said in May.
Australia’s labour market has actually just gone through a great deal of change. It pretty much deregulated itself, with scant help from government. The gig economy — Uber driving, TaskRabbit-ing, Deliveroo-ing and the rest — has provided a totally atomised and exceedingly flexible labour force. A new study found 7% of Australians had found work through one of these platforms.
This extra flexibility in the labour market is probably why labour market participation is so high. It’s easy to work an hour or two these days on your own terms. But it is also part of why underemployment is so high. A gig-economy job is not a reliable source of income that gives a person stability and certainty.
Australia’s terrible wages growth in recent times — which is mirrored overseas — is likely in part to do with the extra flexibility in the labour market that has come about thanks to these platforms. With underemployment and low wages growth a major source of economic weakness, it seems exceedingly risky to add even further flexibility to the market.
The other options
If the government chooses to not take the ideological path of labour market deregulation, there are many other very good options for microeconomic reform. Cities and transport are huge opportunities. Congestion charges that would introduce a market transaction for the use of scarce road space are an idea with a great deal of potential — keeping away low value road users who are able to time-shift their journeys.
The Productivity Commission has also singled out healthcare as an industry rich in potential for reform, suggesting that if we put patients at the centre of the system, outcomes will be far better. “Better healthcare creates no losers,” they say.
Grattan Institute fellow Brendan Coates has argued that easy reform wins might be found in the superannuation space too. Providing a default fund that charged no fees — rather than the expensive defaults that so many of us now have our savings in — would be a huge efficiency gain that only creates winners.
So if the government is dead-set on microeconomic reform, there’s low-hanging fruit for it to pluck. Labour market deregulation is not one of them. Frydenberg would be well-advised to steer clear.